UNIVERSITY  OF  CALIFORNIA 
AT    LOS  ANGELES 


1/5^'"' 


PROBLEMS  IN 
FOREIGN  EXCHANGE 


PROBLEMS  IN 
FOREIGN  EXCHANGE 


BY 

MARTIN  J.  SHUGRUE 

ASSISTANT  PROFESSOR   OF   ECONOMICS, 
HASSACBUSETTS  INSTITUTE  Or  TECUNOLOOT 


D.  APPLETON  AND  COMPANY 

NEW  YORK  LONDON 

1922 


COPYRIGHT,   1920,  BY 

D.  APPLETON  AND  COMPANY 


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In  assembling  the  material  contained  within  these 
pages  the  essential  purpose  has  been  to  present  definitely 
and  concisely  in  the  form  of  specific  problems  the  opera- 
tions of  foreign  exchange.  The  writer  believes  that  this 
work  can  be  utilized  most  effectively  when  supplemented 
by  other  sources  of  information.  In  so  far  as  the  methods 
and  practices  are  concerned,  naturally,  the  most  important 
of  these  sources  is  foreign-exchange  traders  or  business 
men  actually  engaged  in  importing  or  exporting  mer- 
chandise. Current  periodicals,  pamphlets,  weekly  letters, 
and  similar  publications  afford  invaluable  aid  in  obtaining 
knowledge  on  the  more  fundamental  and,  at  the  same 
time,  up-to-date  aspects  of  international  exchange.  Among 
the  more  useful  examples  of  this  second  source  of  informa- 
tion may  be  mentioned  the  Commercial  and  Financial 
Chronicle,  Federal  Reserve  Bulletin,  Financial  Review, 
Economist  (London),  and  publications  of  such  banking  in- 
stitutions as  the  Guaranty  Trust  Company  of  New  York, 
the  National  City  Bank  of  New  York,  the  National  Shaw- 
mut  Bank  of  Boston,  the  First  National  Bank  of  Boston, 
the  Irving  National  Bank  of  New  York,  and  the  National 
Bank  of  Commerce  in  New  York.  Standard  books  fur- 
nish a  third  source  of  information.  Although  there  are 
numerous  good  books  that  deal  with  the  subject  of  foreign 
exchange  the  writer  has  found  especially  helpful  Foreign 
Exchange,  by  A.  C.  Whitaker;  International  Exchange,  by 
A.  W.  Margraff ;  Foreign  Exchange  Explained,  by  Frank- 


31.7468 


vi  PEEFACE 

lin  Escher;  Foreign  Exchange  and  Foreign  Bills,  by  W. 
F.  Spalding ;  Eastern  Exchange  Currency  and  Finance,  by 
W.  F.  Spalding;  Brooks'  Foreign  Exchange  Text  Booh; 
Domestic  and  Foreign  Exchange,  by  E.  L.  Stewart  Patter- 
son ;  Buchan's  Exchange  Tables;  Arbitrations  and  Parities 
of  Foreign  Exchange,  by  C.  A.  Stern ;  Oppenheim/s  Dollar 
Exchange  Tables  and  Foreign  Exchange  Theory  and  Prac- 
tice, by  Thomas  York. 

The  writer  desires  particularly  to  record  his  indebted- 
ness for  assistance  rendered  to  him  by  E.  E.  Agger  of  the 
National  City  Bank  of  New  York;  James  M.  Barker 
of  the  First  National  Bank  of  Boston;  Charles  F.  Breed 
of  Brown  Brothers  and  Company,  Boston ;  Philip  F.  Ebin 
of  Lee,  Higginson  and  Company,  Boston ;  Frank  M.  Ewer 
of  the  Bemis  Brothers  Bag  Company,  Boston;  Harry 
Arthur  Hopf  and  J.  E.  Crane  of  the  Federal  Reserve  Bank 
of  New  York ;  Professor  Davis  R.  Dewey  of  Massachusetts 
Institute  of  Technology ;  and  Professors  O.  M.  "W.  Sprague 
and  H.  R.  Tosdal  of  Harvard  University. 

Martin  J.  Shugkue 


CONTENTS 

PAGE 

Preface   ....    v    .... "^ 

Introduction      ..:.-, •     •    :•     •     ^i 

PART  I 

TYPICAL  PROBLEMS  AND  SOLUTIONS 

A.  Draft  on  English  Bank  Against  a  Shipment  of  Port- 
land Cement  to  Liverpool 3 

B.  Draft  in  Pounds  Sterling  to  Cover  an  Importation 

OF  Crude  Rubber  from  Colombo,  Ceylon     ....      9 

C.  Dollar  Draft  on  an  American  Importer  Against  a 
Shipment  of  Coffee  from  Santos;  Proceeds  to  be 
Invested  in  Sterling  Exchange 13 

D.  Exportation  of  Automobile  Accessories  to  Chile  Fi- 
nanced BY  Means  of  Dollar  Acceptances     ....     16 

E.  Importation  of  Tea  from  China  Financed  by  Means 

of  Dollar  Acceptances 19 

F.  Cotton  Shipped  on  Consignment  Financed  by  Dollar 
Acceptances 24 

G.  Bills  Drawn  with  Some  Such  Clause  as  "  Payable  at 
THE  Drawees'  Buying  Rate  for  Sight  Drafts  on  New 
York" 27 

H.  Foreign  Exchange  Sold  by  an  American  Bank  to  a 
Customer 30 

I.  Chain  Rule:  A  Method  op  Calculation  in  Foreign 
Exchange 32 

J.  Why  Foreign  Exchange  Rates  Tend  to  Correspond 
between  Two  Different  Places 34 

K.  Boston  Bank  in  Account  with  a  London  Corre- 
spondent       !r    R 36 

Tii 


viii  CONTENTS 

/ 

I>AOt 

L.    Finance  Bill  Drawn  on  a  London  Bank 40 

M.    Sale  of  Foreign  Exchange  for  Future  Delivery  by 
AN  American  Manufacturer 43 

N.    Arbitraging  in  Foreign  Exchange 45 

0.    Financing  the  Traveler  Abroad  by  Letter  of  Credit    49 

P.    Travelers'  Checks 53 

PART  II 

PROBLEMS 

I 

sources  of  supply  and  demand 

Problems  1-15 57 

II 

par  of  exchange 
Problems  16-34 63 

III 

theory  of  foreign  exchange  rates 

Problems  35-57 69 

IV 

conversions  in  foreign  exchange 
Problems  58-79 81 

V 

FINANCING  IMPORTS  AND  EXPORTS 

Problems   80-123 85 

VI 

ARBITRAGE  TRANSACTIONS  AND  FINANCE  BILLS 

Problems  12^141 113 

VII 

general  problems 

Problems  142-151 123 


CONTENTS  ix 

PART  m 
APPENDICES 

APPENDIX  A 

FOREIGN   EXCHANGE  DOCUMENTS 

PAOE 

1.  Acceptance  Agreement 131 

2.  Consular  Invoice 134 

3.  Bills  op  Lading 136 

4.  Import  Letter  of  Credit  (Dollars) 138 

5.  Dollar  Import  Letter  of  Credit  Agreement     ,     .     .  140 

6.  Import  Letter  of  Credit  (Pounds  Sterling)    .     .     .  142 

7.  Sterling  Import  Letter  of  Credit  Agreement  .     .     .  143 

8.  Revocable  Export  Credit 146 

9.  Irrevocable  Export  Credit 148 

10.  Trust  Receipts 150 

APPENDIX  B 
foreign  exchange  tables 

1.  Illustrations  of  Parity  Tables  : 

a.  Sterling  into  Francs 158 

I.  Sterling  into  Marks 160 

c.  Sterling  into  Guilders 162 

d.  Guilders  into  Francs 164 

e.  Guilders  into  Marks 165 

2.  Pages  from  "  Buchan's  Exchange  Tables  " : 

a.  Discount  to  be  added  to  60-day  Rate  to  Ascertain 
Value  of  Short  Exchange  or  Cable  Transfers  .      .   166 

h.  Sterling  into  American  Currency  at  Rate  4.86  .   168 

3.  Decimal  Equivalents  of  a  Pound  Sterling  for  Shil- 
ling and  Pence 170 

4.  Values  of  Foreign  Coins ,     .     ,     .  172 


INTRODUCTION 

The  financial  mechanism  of  international  trade  operates 
on  the  same  principles  and  in  a  manner  very  similar  to 
that  of  domestic  trade.  Just  as  banks  in  the  same  city  or 
locality  offset  their  claims  against  each  other  through  the 
clearing  house  and  as  transactions  between  different  cities 
or  localities  are  settled  by  the  operations  of  domestic  bills 
of  exchange  and  telegraphic  transfers,  so  also  in  trade  be- 
tween countries  the  system  of  foreign  bills  of  exchange  and 
telegTaphic  transfers  counterbalances  international  debts, 
leaving  a  relatively  small  final  balance  for  payment  in 
specie. 

International  trade,  like  domestic  trade,  has  built  up 
certain  well  defined  financial  centers  where  the  great  bulk 
of  exchange  transactions  are  carried  on.  By  maintaining 
funds  at  these  places  banks  in  other  parts  of  the  world  can 
sell  drafts  or  the  right  to  draw  them  to  their  customers 
who  wish  to  make  remittances  abroad.  Before  the  war 
London,  by  holding  much  the  same  position  with  respect 
to  the  commerce  of  the  world  as  New  York  occupies  in  the 
trade  of  the  United  States,  was  the  chief  center  of  inter- 
national exchanga  The  war  with  its  consequent  interrup- 
tion in  shipping,  commerce,  and  finance  adversely  affected 
London's  position  and  at  the  same  time  enhanced  New 
York's  importance.     Precisely  what  will  be  the  pei*manent 

effect,  whether  change  in  relative  importance  or  even  the 

zi 


xii  DTTEODUCTION 

possible  shifting  of  the  chief  financial  center  of  the  world 
to  'New  York,  is  as  yet  a  matter  of  conjecture. 

Other  important  foreign  exchange  markets  are  Paris, 
Berlin,  Amsterdam,  Antwerp,  Genoa,  Athens,  Copen- 
hagen, Stockholm,  Christiania,  Madrid,  Buenos  Aires, 
Rio  de  Janeiro,  Yokohama,  Shanghai,  Hongkong,  and 
Calcutta. 

Foreign  exchange  markets,  like  other  markets,  trade  in 
certain  "  commodities."  Just  as  the  stock  exchanges 
trade  in  securities,  or  the  cotton  exchanges  in  cotton  op- 
tions, so  the  foreign  exchange  markets  trade  in  instruments 
for  settling  international  transactions.  By  far  the  most 
important  of  these  instruments  are  bills  of  exchange,^  also 
called  "  bills  "  or  "  drafts."  Hereafter  drafts  and  bills 
will  be  used  synonymously  and  unless  otherwise  specified 
will  refer  to  foreign  bills  of  exchange.  In  simple  lan- 
guage a  bill  of  exchange  may  be  described  as  a  salable 
written  order  made  out  by  a  creditor  against  his  debtor  or 
his  debtor's  bank.  More  exactly  a  bill  of  exchange  is  de- 
fined in  law  as  "  an  unconditional  order  in  writing  ad- 
dressed by  one  person  to  another,  signed  by  the  person 
giving  it,  requiring  the  person  to  whom  it  is  addressed  to 
pay  on  demand,  or  at  a  fixed  or  determinable  future  time, 
a  certain  sum  in  money  to  order  or  to  bearer."  ^ 

Whether  London,  'New  York,  Berlin,  Paris,  or  some 
other  city  is  chosen  as  the  intermediary  in  the  negotiation 

1  Other  instruments  used  aa  media  of  international  settlements 
include  telegraphic  transfers,  gold,  silver,  international  money  orders, 
international  reply  coupons,  travelers'  checks,  currency,  stocks,  bonds, 
bond  coupons,  and  dividend  and  interest  checks. 

2  From  the  Uniform  Negotiable  Instruments  Law,  the  text  of  which 
is  contained  in  HufTcut's  Negotiable  Instruments. 


INTRODUCTION  xiii 

of  foreign  bills  the  essential  principles  underlying  the 
banking  operations  are  the  same.  A  simple  concrete  ex- 
ample will  illustrate  the  point. 

An  export  house  in  New  York  which  we  will  call 
Barker  and  Company  have  sold  to  Eussell  and  Sons,  Ltd., 
of  London,  a  cargo  of  wheat  amounting  to  £100,000. 
Barker  and  Company,  in  accordance  with  the  terms  previ- 
ously agreed  upon,  draw  a  sight  bill  (that  is,  payable  on 
presentation  to  drawees),  for  £100,000  on  Russell  and 
Sons,  Ltd.,  or  the  latter's  London  bank,  and  then  take  this 
bill  of  exchange,  or  draft,  to  a  New  York  banker  who 
buys  it  at  the  market  rate  for  this  particular  class  of  bills. 
The  draft  is  immediately  forwarded  to  a  London  corre- 
spondent  who  arranges  for  its  collection  and  places  the 
proceeds  to  the  credit  of  the  New  York  banker.  The  New 
York  banker  is  willing  to  buy  this  sterling  exchange,  be- 
cause American  importers  are  continually  wanting  Lon- 
don drafts  to  meet  their  obligations  abroad.  With  a  credit 
in  London  the  New  York  banker  can  sell  drafts,  or  the 
right  to  draw  tliem,  against  this  balance  to  his  customers 
who  wish  to  make  foreign  remittances  to  all  parts  of  the 
world.  Suppose,  for  instance,  that  a  firm  of  importers 
has  just  purchased  a  shipment  of  wool  from  Melbourne, 
costing  approximately  £75,000,  and  has  made  the  neces- 
sary arrangements  with  the  New  York  banker  to  finance 
the  transaction  by  means  of  sterling  drafts.  The  New 
York  banker  will  inform  his  London  correspondent  that 
the  Australian  exporters  have  been  authorized  to  draw 
bills  against  the  credit,  opened  in  their  favor  in  London, 
under  certain  specified  conditions.     The  Australian  ex- 


xir  INTRODUCTIONl 

porters  will  be  able  to  convert  tbeir  bills  into  cash  imme- 
diately by  selling  them  to  their  local  bankers  in  Melbourne. 

Although  the  processes  of  foreign  exchange  are  not  al- 
ways as  simple  and  direct  as  in  the  illustration  just  cited, 
yet  there  is  brought  out  the  essential  operations  of  a  for- 
eign exchange  bank,  namely,  the  buying  of  bills,  their 
deposit  with  correspondent  bankers  abroad,  and  the  sale 
of  either  the  right  to  draw  drafts,  or  bills  drawn  by  the 
bank  itself,  against  the  credit  thus  established. 

ISTaturally,  many  different  kinds  of  drafts  are  required 
to  carry  on  the  world's  international  business.  It  is  con- 
venient to  classify  these  drafts  in  three  ways:  first,  as  to 
their  maturity;  second,  as  to  their  origin;  and  third,  as 
to  their  uses. 

As  might  be  expected,  a  draft  payable  immediately  upon 
arrival  abroad  will  command  a  higher  price  than  one  pay- 
able some  time  later.  In  other  words,  "  demand,"  or 
"  sight,"  drafts  which  are  payable  as  soon  as  they  are  pre- 
sented to  the  debtor  or  "  drawee "  will  be  quoted  at  a 
higher  price  than  "time"  bills,  which  need  not  be  paid 
until  a  stated  period  of  time  has  elapsed.  But  since  funds 
can  be  remitted  from  one  country  to  another  more  quickly 
by  cabling  than  by  sending  drafts  through  the  mail,  cable 
quotations  will  be  higher  in  price  than  quotations  for  de- 
mand drafts.  Bills  that  have  a  maturity  of  from  3  to 
30  days  are  termed  short  bills,  while  those  that  run  from 
60  to  90  days  or  more  are  called  long  bills ;  but  both  are 
referred  to  as  time  biUs  to  distinguish  them  from  demand 
or  sight  bills.     Fundamentally,  the  spread  in  price  be- 


INTRODUCTION  xv 

tween  drafts  payable  at  different  dates  is  a  function  of 
time  and  interest.  If  for  any  reason  the  rates  should  get 
"  out  of  line  "  there  are  always  persons  ready  to  seize  the 
opportunity  to  make  a  profit,  thus  causing  the  situation  to 
be  adjusted. 

With  respect  to  their  origin,  drafts  may  be  classified  as 
bankers'  bills  and  commercial  bills.  Bankers'  bills  are 
drafts  drawn  by  bankers  in  one  country  on  their  corre- 
spondent bankers  in  another  country  and  are  of  three  gen- 
eral kinds,  sight  or  demand  bills,  time  bills,  and  finance 
bills.  The  first  two  of  these  differ  from  each  other  only  as 
to  their  date  of  maturity.  Finance  bills  originate  in  ar- 
rangements between  bankers  in  one  country  and  those  in 
another  for  the  object  of  raising  funds.  Finance  bills  are 
commonly  used  for  three  different  purposes:  first,  to  an- 
ticipate a  fall  in  foreign  exchange  prices;  second,  to  take 
advantage  of  a  situation  in  which  interest  rates  are  higher 
in  one  country  than  in  another;  and  third,  to  raise  funds 
regardless  of  the  conditions  of  interest  or  exchange. 

Commercial  bills  are  drafts  arising  from  the  shipment, 
or  sale,  of  goods  and  are  drawn  by  mercantile  houses  on 
other  mercantile  houses  or  banks.  Commercial  bills  vary 
in  two  important  respects:  first,  as  to  their  date  of  ma- 
turity, that  is  whether  they  are  demand  or  sight  bills,  short 
bills,  or  long  bills;  and  second,  as  to  whether  or  not  they 
bear  accompanying  documents  to  act  as  collateral  security. 
When  commercial  bills  have  attached  to  them  such  docu^ 
ments  as  ocean  bills  of  lading,  invoices,  insurance  policies^ 
and  certificates  of  inspection  they  are  known  as  documen- 


xvi  INTRODUCTION 

tary  bills.  Commercial  drafts  having  no  documents  at- 
tached are  called  clean  bills.^ 

The  uses  to  which  foreign  drafts  may  be  put  are  numer- 
ous. In  general,  they  facilitate  settlements  involving  the 
importation  and  exportation  of  merchandise ;  the  importa- 
tion and  exportation  of  securities;  short  time  loans;  in- 
ternational services,  as  for  instance,  insurance,  freight 
charges,  or  those  of  a  personal  nature;  interest  and  divi- 
dend payments ;  repayment  of  the  principal  of  loans  and 
other  remittances,  such  as  money  sent  by  foreigners  to  the 
"  old  country." 

Excluding  finance  bills,  which  are  drawn  by  banks  on 
their  foreign  correspondents  for  the  purpose  of  raising 
funds,  the  great  bulk  of  the  foreign  exchange  transactions 
of  a  bank  consist  of  buying  from  mercantile  houses  com- 
mercial bills  arising  from  the  exportation  of  merchandise 
and  selling  to  mercantile  houses  bankers'  bills  to  finance  the 
importation  of  merchandise.  In  addition  to  its  dealings 
with  mercantile  houses,  an  important  portion  of  the  ex- 
change business  done  by  a  bank  maintaining  a  large  for- 
eign department  is  the  buying  and  selling  of  exchange  to 
cover  its  position  in  the  market. 

3  The  term  "  clean  bill "  is  used  to  refer  to  a  draft  that  does  not 
have  attached  to  it  documents  of  any  kind,  such  as  bills  of  lading, 
insurance  policies,  etc.  All  drafts  drawn  by  piirely  banking  houses 
are  «lean  bills. 


PART  I 
TYPICAL  PROBLEMS  AND  SOLUTIONS 


A.— DRAFT  ON  ENGLISH  BANK  AGAINST  A  SHIP- 
MENT OF  PORTLAND  CEMENT  TO  LIVERPOOL 

Crawford  and  Sons,  engineering  contractors  of  Liver- 
pool, have  arranged  with  their  bankers,  the  London  and 
Liverpool  Bank,  Ltd.,  to  accept  the  drafts  of  the  Atlantic 
Portland  Cement  Corporation  of  New  York  City,  under 
certain  specified  conditions  as  described  in  a  Letter  of 
Credit  forwarded  by  the  English  bank  to  the  American 
exporters.  Although  the  form  and  terms  of  a  letter  of 
credit  may  vary,  in  this  particular  instance  the  following 
are  the  pertinent  facts  therein  contained : 

1.  Credit  opened   with   London   and   Liverpool   Bank, 

Ltd.,  in  favor  of  Atlantic  Portland  Cement  Cor- 
poration by  Crawford  and  Sons; 

2.  Amount  of  credit  not  to  exceed  £8,550 ; 

3.  Credit  expires  at  a  certain  specified  date  unless  pre- 

viously revoked ; 

4.  Drafts  to  be  drawn  at  60  days'  sight; 

5.  Drafts  to  be  accompanied  by: 

a.  Commercial  invoice 
h.  Consular  invoice 

c.  Marine  insurance  policies 

d.  Ocean  steamer  bills  of  lading  made  out  to 

"  order  "  and  endorsed  in  blank. 

It  will  be  noticed  that  the  letter  of  credit,  instead  of 
being  issued  for  an  exact  sum,  stipulates  that  the  total 

3 


4        PEOBLEMS  IN  FOREIGN  EXCHANGE 

amount  of  the  drafts  must  not  exceed  £8,550.  This  is  on 
account  of  the  fact  that  ordinarily  the  precise  invoice 
value  of  the  goods  to  be  covered  by  an  exporter's  draft 
cannot  be  foretold.  Therefore,  some  leeway  must  be  af- 
forded him  at  this  point,  to  take  care  of  items  that  can 
only  bo  approximated  in  advance.  Eor  instance,  the  ex- 
porter might  agree  to  arrange  for  marine  insurance,  with 
the  understanding  that  the  charge  is  to  be  included  in  his 
drafts  against  the  shipments  of  goods.  However,  until 
insurance  had  actually  been  effected,  the  cost  would  only 
be  estimated.  Similarly,  when  goods  are  sold  by  the  bale, 
box,  or  barrel  at  a  certain  price  per  pound,  the  contents 
of  the  containers  usually  vary  and,  consequently,  the  total 
price  cannot  be  determined  with  exactness. 

When  the  Atlantic  Portland  Cement  Corporation  re- 
ceive the  letter  of  credit,  they  will  proceed  to  place  the 
cement  on  board  a  vessel  bound  for  Liverpool  and  draw  a 
60-day3'  sight  bill  on  the  London  and  Liverpool  Bank, 
Ltd.,  for  the  invoice  value  of  the  shipment,  amounting  in 
this  case  to  £8,500  or  £50  less  than  the  face  of  the  letter 
of  credit.  With  the  shipping  documents  specified  in  the 
letter  of  credit  attached,  the  bill  drawn  by  the  American 
exporters  may  be  converted  immediately  into  cash. 

The  Lenox  Trust  Company  of  New  York  after  having 
satisfied  themselves  that  all  the  terms  of  the  letter  of 
credit  have  been  complied  with,  agree  to  purchase  the 
draft,  stipulating  that  it  shall  be  made  payable  to  them- 
selves. The  price  that  they  will  pay  for  the  draft  will  de- 
pend upon  the  amount  they  expect  to  realize  on  it  in  Lon- 
don, or  in  other  words,  the  proceeds  that  their  London 


DRAFT  ON  ENGLISH  BANK  6 

branch  maj  bo  expected  to  obtain  through  the  sale  of  the 
draft  to  a  discount  house  or  a  bill-broker. 

In  order  to  show  how  the  actual  amount  to  be  realized 
on  the  draft  would  be  determined,  let  us  assume  the  con- 
ditions are  as  follows: 

1.  New  York  rate  for  demand  drafts  on  London $3.90 

2.  London  discount  rate  for  GO-days'  sight  bills. .  .7  per  cent 

3.  English  stamp  charges 1/20  per  cent 

4.  Margin  of  profit  for  New  York  bank.  . .  -34  per  cent  per  £ 

5.  Commission  charged  to  account  of  American  bank  by 

London  banker 1/40  per  cent 

COMPUTATION 

Basis:     £100  =  $390. 

Discount  ^  to  be  deducted  by  London  banker,  63  days' 

interest  at  7  per  cent  per  annum  on  £100,  $390.  .$4.72 

English  stamp  duty,  1/20  per  cent 195 

Margin  of  profit  for  New  York  bank,  ^  per  cent  per  £     .25 
Commission  charged  to  account  of  American  bank  by 

London  banker  1/40  per  cent 098 

Total  charges   $5,263 

Since  the  total  charges  on  a  draft  for  £100  amount  to 
$5,263,  the  charges  on  one  pound  will  amount  to  1/100 
part  of  $5,263,  or  $0.05263. 

The  foregoing  computation  shows  that  a  60-days'  sight 
bill  is  worth  $0.05263  less  per  pound  than  a  demand  draft. 
Consequently,  if  the  New  York  banker  can  sell  his  demand 
draft  at  $3.90  on  the  day  of  the  purchase  of  the  60-days' 

1  In  England  three  days  of  grace  are  allowed  on  time  bills.     Inter- 
est is  calculated  on  the  basis  of  305  days  to  the  year. 


PEOBLEMS  m  FOREIGN  EXCHANGE 


He*  V*rk,  H.  Y. 


:..T..r*BrU..**,  i.»H'.. 


- ••  -  -  ittt,  - ...  -  ^ ^^x^/^r"  .i«M  ^^(^^^  First 


tieHT  THOUSAND  FIVE  HUUDREO  POUUK  . 


Ailantlft  rortl»nd  Cwnent  Cerpsratlon. 
Tre. 


^  Treaturcr. 


^J^"    1965  CnelKid I 

,.  /  ^     a, 50*  ....?!*.T.X*?r.'l.'.,'i-.J?:..t_r..-.j..-„T.-..'^.i.r.j.*RrU..'??.i.A?.2fi:^ ^ 

""» -.(/r/y-M/^er^  •'•'"  ,<-^A6i  Second 

yy'- ■■■■■■■ 


.-..-.   OURSELVES 


EIGHT  TWOUSAUD  PTVC  HWDRED  P0UK1>S  •  ■ 


--\ 


J^.yy 


London,  B.  C, 
En^lftnd 


Atlwtle  Portland  Ceaent  Corporation. 

tr«a«urci>. 


/- 


FORii;    1.      COMMERCIAL  DRAFT   OX    AN   ENGLISH   BANK    AGAINST   A   SUIP- 
MENT   OF    CEMENT    TO   LIVERPOOL,    DESCRIBED    IN    PROBLEM    A 

sight  bill,  he  must  deduct  $0.05263  from  this  rate,  giving 
the  rate  of  $3.84737  or,  approximately,  $3.84%,  the  price 
he  could  offer  to  pay  for  a  60-days'  sight  bill. 

The  Atlantic  Portland  Cement  Corporation  would  there- 
fore realize  on  the  sale  of  the  60-days'  sight  draft  for 
£8,500  the  sum  of  $32,703.75  (£8,500  X  3.84%). 

While  the  above  figures  express  the  amount  to  be  real- 
ized from  a  60-days'  sight  draft  for  £8,500  under  the  con- 
ditions mentioned  it  must,  nevertheless,  be  borne  in  mind, 
that  in  the  market  there  are  always  to  be  considered  the 
factors  of  bargaining  and  individual  negotiation,  which, 


DRAFT  ON  ENGLISH  BANK  7 

very  likely,  would  cause  the  proceeds  from  the  sale  of  the 
draft  to  differ  from  the  amount  shown  in  the  computa- 
tion. However,  the  forces  of  competition  would  nor- 
mally prevent  the  occurrence  of  any  substantial  variation. 

After  the  draft  has  been  purchased  by  the  Lenox  Trust 
Company  of  New  York  it  will  be  forwarded  immediately 
to  the  latter's  London  branch.  Otherwise,  in  addition 
to  a  possible  delay  in  England  on  account  of  the  goods 
arriving  before  the  documents,  interest  would  be  lost  by 
the  New  York  bank,  because  a  60-days'  sight  draft  means 
one  payable  at  60  plus  3  days  of  grace  after  it  has  been 
accepted  by  the  party  on  whom  it  has  been  drawn. 

When  the  draft  with  documents  has  been  received  by 
the  London  branch  of  the  Lenox  Trust  Company  of  New 
York,  they  will  present  it  to  the  London  and  Liverpool 
Bank,  Ltd.,  who  will  write  their  name  across  the  front  of 

the  draft  and  stamp  it  "  Accepted (date), 

payable (place),"  retain  the  docu- 
ments, but  return  the  draft  itself  to  the  New  York  bank's 
correspondent. 

The  London  and  Liverpool  Bank,  Ltd.,  will  immediately 
notify  their  customer,  Crawford  and  Sons,  of  the  arrival 
of  the  draft  and  request  that  final  arrangements  be  made 
for  the  release  of  the  documents.  Although  there  is  a 
variety  of  practice  in  surrendering  the  documents  so  that 
the  importer  can  obtain  the  goods  from  the  ocean  carrier, 
let  us  assume  that  in  this  case  the  London  and  Liverpool 
Bank,  Ltd.,  are  willing  to  release  the  documents  to  Craw- 
ford and  Sons  without  calling  for  any  collateral  security. 
When  the  draft  falls  due,  Cravsrford  and  Sons  will  send  a 


8        PROBLEMS  IN  FOREIGN  EXCHANGE 

check  to  the  London  and  Liverpool  Bank,  Ltd.,  for  the 
amount  of  the  draft  plus  the  bankers'  commission,  and  the 
transaction  will  be  ended  as  far  as  the  English  importers 
are  concerned. 

In  the  meantime,  let  us  suppose  that  the  London  branch 
of  the  Lenox  Trust  Company  of  New  York,  in  accordance 
with  instructions  of  their  principal,  have  sold  the  draft  to 
an  English  discount  house  which  holds  it  until  the  date  of 
maturity,  when  it  is  presented  through  the  Clearing  House 
for  settlement  by  the  London  and  Liverpool  Bank,  Ltd. 

So  far  as  the  Lenox  Trust  Company  of  New  York  is 
concerned,  the  transaction  will  result  in  establishing  a 
credit  at  their  London  branch  and  will  thus  make  available 
a  fund  against  which  drafts  can  be  sold  in  New  York. 
With  the  discount  rate  at  7  per  cent  and  stamp  charges  at 
1/20  per  cent,  the  proceeds  placed  to  the  credit  of  the 
Lenox  Trust  Company  of  New  York  would  be  £8,393  Is 
Od.     This  is  arrived  at  as  follows : 

1.  Amount  of  60  days'  sight  draft £8,500 

2.  Deduct  63  days'  discount  at  7  per  cent         103       14s       Od 

3.  Deduct  stamp  charges  at  1/20  per  cent  4        5 


4.  Proceeds    £8,393       Is    Od 


B.— DEAFT  m  POUNDS  STERLING  TO  COVER  AN 
IMPORTATION  OF  CRUDE  RUBBER  FROM  COL- 
OMBO, CEYLON 

The  National  Wire  and  Cable  Company  of  Boston  have 
arranged  with  their  local  bank  to  have  a  credit  opened 
with  Esterling  and  Sons  of  London,  in  favor  of  the  Far 
East  Exporting  Company  of  Colombo,  Ceylon,  against 
shipments  of  crude  rubber  to  Boston.  After  receiving  the 
Boston  bank's  letter  of  credit  authorizing  drafts  on  Ester- 
ling  and  Sons  of  London,  under  certain  stipulated  con- 
ditions, the  Far  East  Exporting  Company  ship  the  rub- 
ber. At  the  same  time  they  draw  a  90-days'  sight  bill 
for  £30,000  on  Esterling  and  Sons  and  attach  to  it : 

1.  Commercial  invoice 

2.  Consular  invoice 

3.  Marine  insurance  policies 

4.  Ocean  steamer  bill  of  lading. 

The  draft  with  documents  attached  will  be  sold  by  the 
Far  East  Exporting  Company  to  their  local  bank  in 
Colombo,  at  the  market  rate  in  rupees,  for  90-days'  sight 
bills  on  London.  Unless  for  some  reason,  such  as  delay 
in  arrival  of  goods,  the  draft  is  not  accepted  in  London, 
the  transaction  is  concluded  so  far  as  the  Colombo  ex- 
porters are  concerned. 

The  Colombo  bank  will  now  send  the  shipping  docu- 

9 


10      PROBLEMS  IN  FOREIGN  EXCHANGE 

ments  directly  to  the  Boston  bank,  so  that  no  delay  will 
be  incurred  by  the  American  importers  in  obtaining  the 
goods  after  arrival,  and  will  forward  the  draft  with  dupli- 
cate shipping  documents  to  Esterling  and  Sons  for  accep- 
tance. If  Esterling  and  Sons  are  satisfied  that  every- 
thing is  in  order,  they  will  accept  the  draft,  retain  the 
documents,  but  return  the  draft  itself  to  the  Colombo 
bank's  correspondent.  The  latter  will  either  hold  the 
draft  until  maturity  93  days  hence  (90  days  plus  3  days 
of  grace),  or  sell  it  in  the  discount  market.  With  the 
London  discount  rate  on  90-days'  sight  bills  at  4  per  cent 
and  stamp  charges  at  1/20  per  cent  the  proceeds  placed  to 
the  credit  of  the  Colombo  bank  in  London  would  be 
£29,679  4s  lid.     This  is  calculated  as  follows: 

1.  Amount  of  90-days'  sight  draft £30,000 

2.  Deduct  93  days'  discount  at  4  per  cent         305       15s       Id 

3.  Deduct  stamp  charges  at  1/20  per  cent  15 


4.  Proceeds    . ., £29,679        4s     lid 

The  duplicate  shipping  documents  will  be  forwarded 
immediately  by  Esterling  and  Sons  to  the  Boston  bank, 
in  order  to  prevent  any  inconvenience  that  might  be  occa- 
sioned by  loss,  or  delay,  of  the  original  documents.  The 
Boston  bank  will  also  be  notified  at  the  same  time  by  its 
London  correspondent,  concerning  the  acceptance  of  the 
draft,  and  will  be  expected  to  provide  in  London  at  matu- 
rity the  necessary  funds,  in  this  case  £30,000,  for  cover. 

On  the  arrival  of  the  rubber  the  National  Wire  and 
Cable  Company  will  want  to  obtain  possession  of  it  for 


DEAFT  IN  POUNDS  STERLING  11 

manufacturing  purposes,  but  since  their  bank  holds  the 
documents,  the  cargo  cannot  be  secured  from  the  steam- 
ship company  until  the  bill  of  lading  has  been  surrendered. 
The  Boston  bank  will  want  to  retain  some  control  over  the 
goods  and.  therefore,  let  us  assume,  will  request  that  its 
customer  sign  a  trust  receipt  when  obtaining  the  bill  of 
lading.  Although  the  form  and  terms  of  a  trast  re- 
ceipt vary,  in  general  this  document  specifies  that  the 
goods  belong  to  the  bank  and  are  being  held  in  trust  by 
the  customer.  Furthermore,  the  customer  agrees  to  turn 
over  to  the  bank  certain  proceeds  of  the  sale  of  the  goods 
manufactured  from  the  crude  rubber,  until  the  total  debt 
is  settled.  The  bank  reserves  the  right  to  take  possession 
of  the  goods  at  any  time,  although  if  this  action  should  be 
considered  necessary,  on  account  of  such  a  matter  as 
financial  embarrassment  of  the  customer,  no  little  difficulty 
might  be  experienced  in  determining  which  of  the  goods 
were  covered  by  the  trust  receipt. 

As  a  matter  of  practice  the  Boston  bank,  while  reserving 
the  right  to  enforce  the  provisions  of  the  trust  receipt, 
will  not  look  to  the  National  Wire  and  Cable  Company 
for  payment  until  it  is  necessary  to  make  remittance  to 
^London  to  cover  the  draft  maturing  there  93  days  (90 
days  plus  3  days  of  grace)  from  the  date  of  its  acceptance 
by  Esterling  and  Sons.  The  Boston  bank  will  give  its 
customer  the  choice  of  settling  by  means  of  a  demand  draft 
on  London,  which  would  have  to  be  purchased  for  mailing, 
let  us  say  12  days  before  the  maturity  of  the  draft  in 
London;  or  of  remitting  by  cable  some  10  days  later. 
Assuming  that  the  National  Wire  and  Cable  Company 


12     PEOBLEMS  m  FOREIGN  EXCHAITGE 

choose  the  former  plan  and  sterling  demand  drafts  are 
selling  at  4.10,  they  will  have  to  send  the  Boston  bank  a 
check  for  $123,000  (£30,000  X  4.10),  plus  a  commission 
of  say  %  per  cent  amounting  to  $922.50,  or  a  total  of 
$123,922.50. 


C—  DOLLAE  DRAFT  ON  AN  AMEEICAN  IMPORTER 
AGAINST  A  SHIPMENT  OF  COFFEE  FROM 
SANTOS;  PROCEEDS  TO  BE  INVESTED  IN 
STERLING  EXCHANGE 

The  Falmouth  Trust  Company  of  Boston  has  received 
for  collection  a  60-days'  sight  bill,  drawn  bv  a  Santos  ex- 
porter on  a  local  coffee  merchant,  for  $15,000.  The  in- 
structions are  that  the  proceeds  shall  be  invested  imme- 
diately in  a  bankers'  demand  draft  on  London  and  for- 
warded to  the  London  and  Liverpool  Bank,  Ltd.,  for  the 
credit  of  the  bank  in  Santos.  If  the  Boston  discount  rate 
for  60-days'  sight  bills  is  6  per  cent,  if  the  Boston  bank's 
charge  for  collection  is  1/4  per  cent  of  the  face  of  the  bill, 
and  if  the  rate  for  bankers'  demand  drafts  on  London  is 
$3,801/^,  what  amount  in  pounds,  shillings,  and  pence  will 
be  placed  to  the  credit  of  the  Santos  bank  in  London  ? 

Would  the  purchase  of  a  90-days'  sight  bill  at  $3.T6 
have  been  more  advantageous,  if  the  London  discount  rate 
for  90-days'  sight  bills  was  5  per  cent  and  the  English 
stamp  charges  were  1/20  per  cent,  or  a  shilling  per  £100  ? 


IS 


14      PROBLEMS  IN  FOREIGN  EXCHANGE 

OOMPDTATION 

1.  Face  of  60-dayB  eight  bill  on  Boston $15,000.00 

2.  Deduct  Boston  discount  60  days  at  6  per  cent  150.00 

3.  Deduct  Boston  bank's  commission  at  i/4  P^r 

cent    37.50 

4.  Proceeds    for    purchasing    bankers'    demand 

draft $14,812.50 

5.  Amount    of    bankers'    demand    draft 

at  3.8OI/2    .  • £3,892     18s       Id 

6.  Deduct  English  stamp  charges,  2  pence 

on  a  demand  draft 2 

7.  Santos  bank's  credit  in  London £3,892     17s     lid 

If  a  90-day8'  sight  bill  had  been  purchased  instead,  the 
credit  in  London  would  have  been  determined  as  follows: 

1.  Proceeds  for  purchasing  90-daYs'  sight  bill.  .     $14,812.50 

2.  Amount  of  90-days'  sight  bill  at  3.76.  £3,939       9s     lid 

3.  Deduct  London  discount,  93  days  at  5 

per  cent   50       3         9 

4.  Deduct  English  stamp  charges  at  1/20 

per  cent  1     19        5 

5.  Santos  bank's  credit  in  London £3,887       6s      9d 

It  is  obvious,  therefore,  that  the  purchase  of  a  demand 
bill  at  3.80^2  is  more  advantageous  to  the  Santos  bank. 
A  situation  of  this  kind,  however,  could  be  only  temporary, 
because  as  long  as  it  lasted,  the  buying  of  demand  drafts 
for  foreign  remittances  would  increase,  while  the  pur- 
chase of  90-days'  sight  bills  would  diminish.     As  a  result 


DRAFT  ON  AMERICAN  IMPORTER         15 


Falmouth  Trust  Company  of  Boston 


uimoit  go  I.IVCTHXI1.  xaa.  vn.,  •!  -.  j  -  -  '•  '  • 


.......  .nazt  ncwAm  tioiit  vrntaa  mlrn  Tto  ronos.  isA  ------  C^fCfi/'cift^t'-^ 

Pell  PRO   t^^^m       ■  i^j*i  1.1  ^1  ■  »■  limn    "      'J'iV  'i/ifwytWTAt 

Falmouth  Trust  Company  of  Boston ,  .;t.'...i-'  ...<^i« 


X10  xcu       182  Lombard  Street.,         ,  n" 'po_.... 

f'T-M.MS —  London. 


•  lATff  •  •  i)  *^<rl  •«*>•  •  rfr  4a  ■-«  4^  *«•■  • 


Falmouth  Trust  Company  of  Boston 


,•*--: ...  -  -  -ram  movsAin)  jigbt  hocxied  ^jkjw  -pro  nuffis  i«A  -------  rSC<^€^f^^^ 

PalmouthTrust  Company  of  Boston.  "  "       ^Uaat  S^SIttV 

xfs  alien       182  Lombard  Street,,       ,  mrpm, .»-..« 

H..8^w?,..«  London. 


FOBM   2.      BANK   DRAFT  IN   POUNDS    STERLING   PAYABLE  ON  DEMAND  FOB 
MAKING    BEMITTANCE    TO    LONDON,    DESCEIBED    IN    PEOBLEM    C 

the  prices  of  each  of  these  two  classes  of  drafts  would  tend 
to  be  established  at  such  levels  as  to  offer  no  opportunity 
for  profit  in  one  as  compared  with  the  other. 


D.— EXPORTATION  OF  AUTOMOBILE  ACCESSO- 
EIES  TO  CHILE  FINANCED  BY  MEANS  OP 
DOLLAR   ACCEPTANCES 

Garcia  and  Ayala  of  Valparaiso  have  placed  an  order 
with  the  Auto  Supply  Company  of  New  York  City  for 
a  shipment  of  automobile  accessories  amounting  to  $80,000 
and  have  arranged  with  their  Valparaiso  bank  to  finance 
the  transaction  on  90-days'  credit.  The  Valparaiso  bank 
issues  a  commercial  letter  of  credit  on  its  banking  cor- 
respondent in  New  York,  the  Amsterdam  Trust  Company, 
J-equesting  the  latter  to  accept  90-days'  sight  drafts  drawn 
by  the  Auto  Supply  Company,  under  certain  stipulated 
terms  and  conditions,  but  not  exceeding  in  total  amount 
the  sum  of  $80,000. 

When  the  Amsterdam  Trust  Company  have  received 

these  instructions,  which  would  ordinarily  be  in  the  form 

of  a  cable,  they  notify  the  Auto  Supply  Company  of  the 

opening  of  the  credit,  stating  the  terms  and  conditions. 

The  Auto  Supply  Company  now  ship  the  goods  and  obtain 

from  the  steamship  company  ocean  bills  of  lading.     In 

accordance  with  the  terms  of  the  letter  of  credit,  they  also 

arrange  for  marine  insurance  on  the  cargo  and  obtain  from 

local    underwriters    the    proper    insurance    certificates. 

Having  taken  care  of  all  of  the  shipping  details,  the  Auto 

Supply  Company  draw  on  the  Amsterdam  Trust  Company 

a  90-days'  sight  draft  for  the  amount  of  the  shipment  and 

16 


DOLLAR  ACCEPTANCES  17 

attach  to  it  the  shipping  documents  provided  for  in  the 
letter  of  credit,  including  the  original  commercial  invoice, 
ocean  bills  of  lading,  consular  invoices,  and  insurance  cer- 
tificates.    If  everything  is  in  order,  the  Amsterdam  Trust 


$  ao.ooo.oo  .**.?. y.'^^t.V.-.y.- .*j«;U.  2?. /9Z.<>. 

At  nlnotv  diyi -  -  v%W/^    "*tf>* ^la/i/i^/M/fime/^fp' 

E^  s,  ^\  '    ty       ./?  V 

.T.r.r..'r.r..-.r..^ -.:.-..-..:.-  -  jJwkelve^  |^-  4  —..-.-.  --.-.--.•• -A/i€:J^i/n/,<fy 
^    Q   .3  J  o  ~^  ? 

RIGHTY  THOOSANn  BOLIAJW  OO/lOolfcJ-  -M  -^  -^S^~^J • ■-...-.- 

'^^^^ym^V^^tl^J^agif'^^mrj)/^^^  *51«  B«*  of  V.lp.ral.0. 

Z      ^J      '^     "3  -I;  Ai  <  <l»ted  Mar.  S,   1920. 

^/4f^  Th«  AiMt«ra»«  Trust  Cob^R}^     eg      a  ^ 

,;;" — -^ != y^  (B.  J»^-^ 

JY°    '»».._ - ^  Tr..super. 


FOBM    3.      BANK    ACCEPTANCE    FOB    FINANCING    EXPORTATION    OF    GOODS 
TO    CHLLE,    DESCRIBED    IN    PEOBLEM    D 

Company  "  accept "  the  draft  upon  presentation  and  then 
discount  it  for  90  days  at  the  market  rate  of  interest 
and  pay  the  proceeds  to  the  Auto  Supply  Company.  Sup- 
posing the  draft  vs'as  drawn  for  exactly  $80,000  and  that 
the  bank  discount  rate  was  6  per  cent,  the  proceeds  of 
the  draft  would  be  $78,800.  The  following  calculation  is 
explanatory : 

Amount  of  90-day  draft $80,000 

Deduct  discount  for  14  of  a  year  at  6  per  cent  ....         1,200 


Proceeds    $78,800 

The  documents  are  then  forwarded  by  the  Amsterdam 
Trust  Company  to  the  Valparaiso  bank,  which  will  be 


18      PROBLEMS  IN  FOEEIGN  EXCHANGE 

advised  that  a  draft  for  the  amount  of  the  invoice  has 
been  "  accepted  "  for  its  account  against  the  credit  issued. 
Upon  the  arrival  at  Valparaiso,  the  documents  will  be 
turned  over  to  Garcia  and  Ayala,  in  accordance  with  the 
bank's  customary  arrangements,  or  as  provided  for  in  an 
agreement  previously  entered  into  between  the  bank  and 
its  customer. 

At  the  maturity  of  the  draft  in  New  York,  the  Valpa- 
raiso bank  will  have  to  deposit  sufficient  funds  with  the 
Amsterdam  Trust  Company  to  enable  the  latter  to  meet 
their  "  acceptance  "  and  obtain  the  customary,  or  previ- 
ously agreed  upon,  acceptance  commission. 


E.— IMPORTATION  OF  TEA  FEOM  CHINA  FI- 
NANCED BY  MEANS  OF  DOLLAR  ACCEP- 
TANCES 

Williams  and  Company  of  Boston  have  purchased  from 
the  Oriental  Export  Company  of  Shanghai  a  cargo  of  tea 
costing  approximately  $50,000.  After  the  details  of  the 
transaction  have  been  arranged  between  the  importer  and 
the  exporter,  Williams  and  Company  apply  to  the  Hub 
National  Bank  of  Boston  for  a  commercial  letter  of  credit 
for  $50,000.  The  tea  being  bought  on  four  months' 
time,  the  Hub  National  Bank  issues  a  letter  of  credit  au- 
thorizing the  Oriental  Export  Company  to  draw  upon  it 
four  months'  sight  drafts  covering  the  cost  of  the  shipment, 
or  shipments,  but  not  exceeding  in  total  amount  the  sum  of 
$50,000.  The  letter  of  credit  stipulates  that  full  sets  of 
shipping  documents,  including  the  original  commercial 
invoice,  a  consular  invoice,  ocean  bills  of  lading,  and  in- 
surance certificates,  must  be  attached  to  the  draft. 

If  Williams  and  Company  are  in  no  particular  hurry 
to  receive  the  tea,  the  letter  of  credit  will  be  turned  over 
to  them  by  the  Hub  National  Bank  to  be  mailed  to  the 
Oriental  Export  Company.  It  is  more  probable,  how- 
ever, that  Williams  and  Company  will  wish  the  cargo  to 
be  shipped  immediately.  In  this  case  it  becomes  neces- 
sary for  the  Hub  National  Bank  to  send  a  cable  to  its 
banking  correspondent  in  Shanghai,  advising  this  bank  of 

the  issuance  of  the  credit  and  stating  the  terms  and  con- 
Id 


20      PROBLEMS  IN  FOREIGN  EXCHANGE 

ditiona.  The  Shanghai  bank,  in  turn,  notifies  the  Oriental 
Export  Company  of  the  opening  of  the  credit  in  their 
favor. 

The  Oriental  Export  Company,  having  arranged  for 
cargo  space,  wiU  put  the  tea  on  board  a  vessel  bound  for 
the  United  States  and  obtain  from  the  steamship  com- 
pany ocean  bills  of  lading  covering  the  shipment.  In 
accordance  with  the  terms  of  the  letter  of  credit,  they  also 
secure  from  local  marine  insurance  agents  necessary  cov- 
erage on  the  cargo.  The  Oriental  Export  Company  now 
draw  a  draft  on  the  Hub  National  Bank  at  four  months' 
sight  for  the  amount  of  the  invoice,  not  exceeding,  how- 
ever, $50,000  the  total  credit  issued.  To  the  draft  they 
attach  the  required  shipping  documents,  including  the  or- 
iginal commercial  invoices,  ocean  bills  of  lading,  and  in- 
surance certificates.  The  draft  and  documents  comprise 
what  is  known  as  a  "  documentary  long  bill."  It  is  taken 
by  the  Oriental  Export  Company  to  their  local  bank,  which 
purchases  it  at  the  market  rat€  for  this  class  of  sight  drafts 
and  pays  them  the  proceeds  in  Chinese  money. 

The  negotiating  bank  in  Shanghai  now  forwards  the 
draft  to  its  Boston  correspondent,  with  the  instructions 
that  it  be  presented  to  the  Hub  National  Bank  for  "  accep- 
tance." Assuming  that  everything  is  in  order,  that  is,  in 
accordance  with  the  terms  of  the  letter  of  credit,  the 
Hub  National  Bank  "  accepts  "  the  draft  and  returns  it 
to  the  presenting  bank,  after  detaching  the  shipping  docu- 
ments which  will  be  held  as  security  against  the  acceptance. 

The  draft  has  now  become  a  bank  acceptance  and  may 
be  sold  in  the  open  discount  market.     When  it  has  not 


DOLLAR  ACCEPTANCES  21 

more  than  three  months  to  run,  it  will  be  eligible  for 
purchase  by  a  Federal  Reserve  Bank. 

Following  the  instructions  of  their  Shanghai  correspon- 
dent, the  presenting  bank  in  Boston  discounts  the  draft 


t  is.M'i.si  shmffMi. ^.  »pr.ii..*:4£ _..  i^92.9...., 

rORTT  MIME  THOUSAUD  TfO  HUKDRED  fc"*-*  rQUR3'i^''yi<>2aaLLAI«S .............. 

^^M6avc€^*v<^yam/i£^fm  M^JaSi€^i3u^^^:^vf  ^'^^v^'^^  tm  ss  cum.  u«m 

^j^    tb*  Bob  ItaU&n*!  Bank     J-*      <     sS 

"■^  ■*^'"Z'»  OrlaoUl  T««  Co. 


J/^..^-. 


.    lUnA^or. 


FOBM    4.      BANK    ACCEPTANCE    FOB    FINANCING    IMPOETATION    OF    TEA, 

DESCEIBED   IN   PEOBLEM   E 

and  places  the  proceeds  to  the  credit  of  the  Chinese  bank. 
The  Shanghai  bank  can  sell  drafts  against  this  credit  to 
customers  purchasing  goods  in  the  United  States  and  thus 
obtain  reimbursement  for  the  money  paid  to  the  Oriental 
Export  Company. 

Having  received  all  the  documents  pertaining  to  this 
importation  of  tea,  the  Hub  National  Bank  notifies  its 
customer,  Williams  and  Company,  of  the  fact.  When  the 
vessel  carrying  the  tea  arrives,  it  will  be  necessary  for 
Williams  and  Company  to  obtain  possession  of  the  docu- 
ments, so  that  arrangements  can  be  made  for  unloading  the 
cargo  and  for  its  entry  at  the  Custom  House. 

Upon  surrendering  the  documents,  the  Hub  National 
Bank  will  desire,  as  a  matter  of  security,  to  reserve  some 


22   PEOBLEMS  IN  FOREIGN  EXCHANGE 

control  over  the  goods  and,  therefore,  will  require  its 
customer  to  sign  a  trust  receipt.  Although  the  form  and 
terms  of  a  trust  receipt  vary,  in  general  this  document 
specifies  that  the  goods  belong  to  the  bank  and  are  being 
held  in  trust  by  the  customer.  In  this  particular  transac- 
tion, a  common  arrangement  would  require  that  the  mer- 
chandise be  stored  in  a  public  warehouse  and  the  ware- 
house receipt  be  turned  over  to  the  Hub  National  Bank, 
pending  the  sale  or  delivery  of  the  goods. 

When  Williams  and  Company  request  the  tea  in  order 
to  complete  a  sale  actually  made  or  contemplated,  the  Hub 
National  Bank  will  require  that  a  second  trust  receipt  be 
signed,  whereby  Williams  and  Company  pledge  themselves 
to  turn  over  to  the  bank  the  proceeds  of  the  sale  when 
payment  is  received  until  the  total  debt  is  settled.  The 
bank  reserves  the  right  to  take  possession  of  the  goods 
at  any  time,  although  as  already  explained  in  Problem 
B,  if  this  action  should  be  considered  necessary,  on  ac- 
count of  such  a  matter  as  financial  embarrassment  of  the 
customer,  no  little  difiiculty  might  be  experienced  in 
determining  which  of  the  goods  were  covered  by  the  trust 
receipt. 

As  a  matter  of  practice  the  Hub  National  Bank,  while 
reserving  the  right  to  enforce  the  provisions  of  the  trust 
receipt,  will  not  look  to  Williams  and  Company  for  pay- 
ment until  the  maturity  of  the  draft  four  months  hence. 
At  that  time  Williams  and  Company  will  draw  their 
personal  check  in  favor  of  the  Hub  National  Bank  for 
the  face  of  the  draft,  plus  a  commission  on  the  letter  of 
credit  of  probably  from  %  to  %  per  cent,  the  actual  rate 


DOLLAR  ACCEPTANCES  23 

being  a  matter  of  private  adjufltment  between  the  bank  and 
the  customer  and  varying  to  a  considerable  degree,  accord- 
ing to  the  character  of  the  bank's  client 


R— COTTON     SHIPPED     ON     CONSIGNMENT     FI- 
NANCED   BY    DOLLAR    ACCEPTANCES 

Dawson  Brothers,  cotton  buyers  of  Fort  Worth,  Texas, 
are  making  arrangements  to  ship  600  bales  of  cotton, 
costing  $190,000,  on  consignment  to  Jackson  and  Son, 
Ltd.,  of  Liverpool,  for  sale  after  arrival.  In  order  to 
avoid  a  possible  loss  on  account  of  a  declining  market, 
Dawson  Brothers  "  hedge "  by  selling  futures  at  the 
iNew  York  Cotton  Exchange.  They  then  request  the 
Oceanic  National  Bank  of  New  York  City  to  finance  the 
shipment,  which  is  to  be  sent  by  railroad  from  Fort  Worth 
to  New  York,  and  from  there  by  steamer  to  Liverpool. 

Having  agreed  to  finance  the  transaction  by  means  of 
bankers'  acceptances,  the  Oceanic  National  Bank  author- 
izes Dawson  Brothers  to  draw  upon  it  at  60  days'  sight, 
for  85  per  cent,  of  the  purchase  price  of  the  cotton,  that  is 
$161,500,  with  the  understanding  that  the  railroad  bills 
of  lading  covering  the  shipment  are  to  be  attached  to  the 
draft. 

After  making  the  shipment  at  Fort  Worth,   Dawson 

Brothers  draw  on  the  Oceanic  National  Bank  at  60  days' 

sight  and,  having  attached  to  the  draft  the  railroad  bills  of 

lading,  place  it  in  the  mail.     Four  or  five  days  later  the 

Oceanic  National  Bank  "  accepts  "  the  draft,  sells  it  in 

the   open   market,    and   credits    the   account   of   Dawson 

Brothers  for  the  proceeds.     Supposing  that  the  market 

24 


DOLLAR  ACCEPTANCES  25 

discount  rate  for  this  class  of  bills  is  6  per  cent,  the  pro- 
ceeds placed  to  the  credit  of  Dawson  Brothers  would  be 
$159,885: 

Amount  of  90-days'  draft $161,500 

Deduct  discount  for  60  days  at  6  per  cent 1,615 

Proceeds $159,885 

The  bank  retains  the  railroad  bills  of  lading  and,  for 
additional  security,  requires  Dawson  Brothers  to  sign  an 
acceptance  agreement,  pledging  the  600  bales  of  cotton  as 
collateral  for  the  credit,  and  promising  to  furnish  the 
bank  with  sufficient  funds  to  meet  its  "  acceptance  "  at 
maturity. 

When  the  cotton  reaches  New  York  the  Oceanic  National 
Bank,  having  already  arranged  for  the  necessary  cargo 
space,  will  put  it  on  board  a  steamer  bound  for  Liverpool 
and  obtain  the  ocean  bills  of  lading  covering  the  ship- 
ment. As  previously  agreed  between  the  bank  and  its 
customer,  insurance  on  the  cotton,  while  in  transit  to 
England,  will  be  provided  for  by  Dawson  Brothers  and 
the  policies  will  be  sent  immediately  to  the  Oceanic 
National  Bank.  These  policies,  together  with  the  ocean 
bills  of  lading,  will  be  forwarded  by  the  bank  to  its  Liv- 
erpool correspondent,  with  the  instructions  that  on  arrival 
of  the  cargo  the  cotton  is  to  be  stored  in  a  warehouse,  pend- 
ing further  advice. 

Jackson  and  Son,  Ltd.,  the  English  agents  of  Daw- 
son Brothers,  are  notified  of  the  arrival  of  the  cotton  by 
the  Liverpool  bank  and  immediately  make  arrangements 


26   PROBLEMS  IN   FOREIGN  EXCHANGE 

for  disposing  of  the  coTaaigninent  in  the  local  market. 
When  the  sale  has  been  completed,  the  Liverpool  corre- 
spondent of  the  Oceanic  National  Bank,  acting  on  instruc- 
tions from  New  York,  will  deliver  the  cotton  to  the  buyer 
against  payment  for  the  amount  of  the  invoice  in  English 
money,  or  against  a  written  promise  to  pay  within  10 
days. 

On  the  payment  of  the  invoice  by  the  Liverpool  cotton 
buyer,  the  Oceanic  National  Bank  will  be  notified  by  its 
English  correspondent  that  the  amount  collected,  which 
will  be  specified,  has  been  placed  to  credit  of  the  New 
York  bank.  The  Oceanic  National  Bank  immediately 
converts  the  Liverpool  credit  into  dollars,  at  the  market 
rate  for  New  York  telegraphic  transfers  on  London.  The 
proceeds  of  the  amount  converted  into  dollars  are  applied 
to  the  payment  of  Dawson  Brothers'  draft  for  $161,500 
and  the  balance,  after  deducting  the  necessary  commission, 
charges,  is  placed  to  their  credit. 

Very  often  it  happens  that  the  bank  receives  funds  from 
abroad  before  the  maturity  of  its  '^  acceptances."  In  such 
cases,  the  bank  would  rebate  the  interest  allowed  until 
maturity. 


G.— BILLS  DRAWN  WITH  SOME  SUCH  CLAUSE  AS 
«  PAYABLE  AT  THE  DRAWEES'  BUYING  RATE 
FOR  SIGHT  DRAFTS  ON  NEW  YORK" 

Moseley  and  Company  of  New  York  have  shipped  some 
drugs  and  chemicals  to  Lopez  and  Cravellas  of  Eio 
do  Janeiro.  According  to  the  terms  agreed  upon  $12,- 
000  in  United  States  money  is  due  the  exporters  in  New 
Y'ork  on  the  day  of  shipment,  interest  at  6  per  cent  being 
chargeable  for  any  delay  in  payment.  It  has  been  agreed 
also  that  settlement  is  to  be  effected  by  a  90-days'  sight 
bill,  drawn  in  dollars  by  the  exporters  on  the  importers. 

In  order  that  the  exporters  may  realize  $12,000  imme- 
diately upon  the  shipment,  the  original  draft  must  be 
drawn  to  allow  not  only  for  the  New  York  banker's  com- 
mission, but  also  for  a  certain  number  of  days  that  will 
elapse  before  funds  from  Rio  de  Janeiro  will  reach  New 
York.     The  face  of  the  draft  is  computed  as  follows: 

Cash  price  of  goods  at  New  York $12,000 

Interest  on  above  sum  for  140  days  at  6  per  cent  280 

Period  of  140  days  arrived  at  in  this  manner: 

Mail  time  to  Rio  de  Janeiro 25  days 

Time  from  acceptance  to  maturity.  .     90  days 

Mail  time  return  draft  to  New  York     25  days 

Boston    bankers'    commission    at    1/4    per   cent   on 

$12,000    30 

Total  amount  to  be  drawn  $12,310 

27 


28   PROBLEMS  IX  FOREIGN  EXCHANGE 

Moseley  and  Company  now  proceed  to  draw  a  bill  in 
a  form  similiar  to  the  following  specimen : 

$12,310.  New  York,  N.  Y.,  May  1,  1920. 

At  ninety  days  after  sight  of  this  First  of  Exchange  (second 
unpaid)  pay  to  the  order  of  the  Latin  American  Banking 
Corporation,  Twelve  Thousand,  Three  Hundred  and  Ten 
Dollars,  United  States  gold,  payable  in  Brazilian  currency  at 
the  said  bank's  drawing  rate  on  the  day  of  payment  for  sight 
drafts  on  New  York. 
Value  received  per  S.  S.  Sao  Paulo. 

Moseley  and  Company. 
To  Lopez  and  Cravellas, 

Eio  de  Janeiro. 

The  draft  is  drawn  payable  to  the  Latin  American 
Banking  Corporation,  so  that  this  institution  may  pur- 
chase it  outright  or  receive  it  for  collection.  In  the  for- 
mer case  Moseley  and  Company  will  receive  $12,000  (or 
approximately  that  sum),  while  under  the  second  plan 
the  proceeds  obtained  by  the  exporters  would  be  $12,280 
(or  $12,310  less  the  New  York  banker's  commission  of 
$30),  but  about  140  days  will  elapse  before  these  funds 
are  received.  For  the  most  part  the  draft  will  go  through 
very  much  the  same  channels  in  either  case.  The  New 
York  office  of  the  Latin  American  Banking  Corporation 
will  immediately  forward  the  draft  to  the  Rio  de  Janeiro 
branch,  which  will  present  it  to  Lopez  and  Cravellas  for 
"  acceptance." 

Ninety  days  after  "  acceptance  "  the  draft  will  mature 
and  the  importers  will  be  required  to  turn  over  to  the 
Rio  de  Janeiro  bank  sufficient  funds  in  Brazilian  money, 
to  purchase  a  sight  bill  on  New  York  for  $12,310.     If  the 


BILLS  DEAWE"  WITH  SPECIAL  CLAUSE     29 

rate  in  Rio  de  Janeiro  at  this  particular  time  was  3% 
milreis  per  dollar,  Lopez  and  Cravellas  would  discharge 
their  debt  by  the  payment  of  46,162.50  milreis  (33^4  X 
12,310),  written  46,162  $  500,  Brazilian  fashion.  Upon 
receiving  this  sum  the  bank  at  Rio  de  Janiero  either 
mails  a  draft  for  $12,310  to  its  branch  in  ISTew  York  or 
credits  the  latter's  Brazilian  account,  depending  upon  the' 
specific  instructions  from  New  York. 

The  object  of  Moseley  and  Company,  in  drawing  the 
original  bill  in  dollars,  was  to  avoid  the  risk  of  fluctuations 
of  exchange,  which  would  be  involved  if  the  bill  were 
drawn  in  milreis.  This  risk  is  particularly  great  in  the 
case  of  Brazil,  because  the  countiy  has  not  yet  definitely 
adopted  a  gold  standard  or  followed  a  successful  plan  for 
stabilizing  its  foreign  exchanges.  By  drawing  a  bill  in 
dollars  the  exporters  do  not  eliminate  the  risk  of  fluctua- 
tion of  exchange  from  the  settlement,  but  what  they  do 
accomplish  is  to  shift  it  entirely  to  the  importers.  The 
importers,  however,  may  protect  themselves  through 
"  hedging  "  at  any  time  before  the  maturity  of  the  draft, 
by  purchasing  New  York  exchange  for  future  delivery. 

If  Moseley  and  Company  had  drawn  their  draft  in 
pounds  sterling,  the  only  difi'erence  in  the  situation  would 
be  that  the  exporters  would  realize  a  predetermined  sum 
in  English  money,  instead  of  in  dollars.  During  and 
subsequent  to  the  War  the  wide  variations  in  sterling  ex- 
change have  made  settlements  of  transactions  between  the 
United  States  and  Brazil  through  the  medium  of  British 
banks  rather  undesirable. 


H.—  rOKEIGN  EXCHANGE  SOLD  BY  AN  AMERICAN 
BANK  TO  A  CUSTOMER 

A  New  York  merchant  submits  to  his  bank  a  list  of 
foreign  drafts  which  he  desires,  and  arranges  for  pur- 
chasing them  at  the  following  rates : 

1.  £2,000  at  4.15 

2.  5,000  francs  at  7.85 

3.  6,000  lire  at  9.50 

4.  1,000  drachmas  at  17.25 

5.  1,200  yen  at  501^ 

6.  500  pesetas  at  18.90 

(a)  Find  the  total  in  dollars  that  he  has  to  pay  for 
the  six  different  kinds  of  drafts. 

(6)  How  much  of  each  of  the  above  foreign  currencies 
could  he  obtain  for  $1,000  at  the  rates  given? 


(a) 


SOLUTION 

1. 

£2,000  at  4.15.                   2,000  X    4.15: 

—  $8,300.00 

2. 

5,000  francs  at  7.85.            5,000  -f-    7.85 : 

—        636.94 

3. 

6,000  lire  at  9.50.               6,000-4-    9.50  = 

=        631.58 

4. 

1,000  drachmas  at  17.25.    1,000  X  17.25  = 

=        172.50 

5. 

1,200  yen  at  5OV2.               1,200  X  50i/o  : 

—        606.00 

6. 

500  pesetas  at  18.90             500  X  18.90: 
Total  cost  of  drafts  (answer) 

=          94.50 

7. 

$10,441.52 

30 

Francs 

7850 

Lire 

9500 

Drachma 

s   5797.10 

Yen 

1980.20 

FOREIGN  EXCHANGE  SOLD      31 

(6)  $1,000  at  the  ahove  rates  would  purchase: 

1.  Sterling  at  4.15.         1,000 -f  4.15      =  £240  19s  3d 

2.  Francs  at  7.85.  1,000  x  7.85 

3.  Lire  at  9.50.  1,000  x  9.50 

4.  Drachmas  at  17.25.  1,000  t-    .1725 

5.  Yen  at  SOy^.  1,000  ^    .505 

6.  Pesetas  at  18.90.       1,000^    .1890  =  Pesetas       5291. 

Forei^  exchanjjje  quotations  are  usually  made  with 
reference  to  the  amount  of  the  draft  purchased.  For 
instance,  a  bank  may  charge  a  fraction  of  a  point  more 
for  a  draft  amounting  to  less  than  $100  than  for  one 
from  $100  to  $10,000  and  may  offer  special  rates  on 
drafts  costing  $10,000  or  more.  The  term  "  actual " 
rates  is  used  to  refer  to  the  rates  governing  transactions 
between  bankers  and  dealers  themselves  or  the  rates  at 
which  larger  purchases  of  merchants  from  bankers  take 
place.  "  Posted,"  or  nominal,  rates  are  those  charged 
by  bankers  for  checks  and  letters  of  credit  sold  in  small 
lots. 


I.— CHAIN  RULE:    A  METHOD  OF  CALCULATION 
IN  FOREIGN  EXCHANGE 

The  Chain  Eule  is  a  convenient  method  of  making  cal- 
culations in  dealing  with  such  foreign  exchange  problems 
as  arbitrage  transactions  or  conversions.  It  consists  of 
arranging  the  terms  of  the  exchanges  in  the  various  cur- 
rencies under  consideration  in  such  a  manner  that  the 
answer  is  quickly  obtained. 

Example  1.  A  New  York  bank  has  drawn  a  60-days' 
sight  bill  on  London  for  which  it  must  remit  at  once. 
With  New  York  cable  transfers  on  London  selling  at  $4.70 
and  London  cables  selling  in  Paris  at  28  francs  per  pound 
sterling,  what  is  the  highest  rate  the  New  York  bank  can 
afford  to  pay  in  New  York  for  exchange  on  Paris,  to  be 
used  there  for  purchasing  the  required  London  cables  ? 

How  many  x  =  h  How  many  francs  (x)  =  1  dollar 

it   h  =  c  if  $4.70  =  1  pound 

and  c  =  d  and  1  pound  =  28  francs 


and  d  =  x 


SOLUTION 

^  ^  ^  ^  ^^    =5.957  francs 
4.70  X  1 


32 


CHAIN  RULE  83 

Example!  2.  By  use  of  the  Chain  Rule  detennine  the 
par  of  exchange  between  the  dollar  and  the  sovereign 
with  the  facts  given  as  below: 

How   many   dollars    (a;)  =  1  sovereign 

if  a  sovereign  =123.27447   grains   of   Eng- 

lish standard  gold 
if  12  grains  of  English  stand- 
ard gold  =  11  grains  of  pure  gold 
if  9  grains  of  pure  gold  =10     grains     of     American 

standard  gold 
and  if  25.8  grains  of  Ameri- 
can standard  gold  =  1  dollar 


SOLUTION" 

1  X  123.27447  X  H  X  10  X  1 


$4.86656 


1  X  12  X  9  X  25.8 

It  will  be  observed  that  in  both  of  the  above  cases  the 
equations  follow  a  regular  order.  The  left-hand  side  of 
the  first  equation  always  has  the  same  denomination  as 
the  right-hand  side  of  the  last  equation,  and  the  right-hand 
side  of  each  equation  is  identical  in  denomination  with 
the  left-hand  side  of  the  equation  below  it.  Thus  the 
terms  of  the  different  equations  are  connected  like  the 
links  of  a  chain. 


J.— WHY  FOREIGN  EXCHANGE  RATES  TEND  TO 
CORRESPOND  BETWEEN  TWO  DIFFERENT 
PLACES 

Foreign  exchange  rates  tend  to  correspond  between  two 
different  places:  for  instance,  when  exchange  on  Paris  is 
at  a  discount  in  New  York,  dollar  exchange  in  Paris  will 
be  at  a  premium.  Expressed  more  concretely,  when  it  is 
possible  to  purchase  in  New  York  the  right  to  obtain  10 
francs  in  Paris  for  a  dollar,  a  dollar  would  ordinarily  be 
quoted  at  10  francs  in  Paris,  as  compared  with  b.lSYs 
francs  when  exchange  is  at  par.  Assume  that  the  rate 
in  Paris  suddenly  advances  half  a  point,  without  a  corre- 
sponding change  in  New  York.  Although  on  a  market 
subject  to  violent  fluctuations  foreign  exchange  traders 
might  consider  the  risks  too  great  to  warrant  speculation, 
nevertheless,  any  such  situation  as  the  one  under  con- 
sideration could  not  prove  more  than  temporary. 

Under  the  conditions  given  above,  a  New  York  foreign 
exchange  broker  cables  his  Paris  correspondent  to  sell 
dollar  drafts  on  New  York  in  the  Paris  market.  At  the 
rate  of  10l/>  francs  to  a  dollar,  $100,000  would  place 
1,050,000  francs  to  the  credit  of  the  New  York  broker 
in  Paris.  At  the  same  time  the  New  York  broker  sells 
in  the  N"ew  York  market  drafts  on  Paris.  At  the  rate  of 
10  francs  to  a  dollar  the  sale  of  1,050,000  francs  would 
realize  $105,000.     But,  since  he  started  with  only  $100,- 

000,  the  New  York  foreign  exchange  broker  would  make 

34 


FOREIGN  EXCHANGE  RATES  35 

a  profit  of  $5,000  before  allowing  for  commissions  and 
other  incidental  expenses. 

The  result  of  transactions  of  this  kind  would  be  to 
increase  the  buying  pressure  of  francs  in  Paris  and  thus 
cause  less  to  be  offered  for  a  dollar  in  France,  and  to 
increase  the  selling  pressure  of  francs  in  New  York  and 
thus  cause  more  to  be  offered  for  a  dollar  in.  the  United 
States. 


K— BOSTON  BANK  IN  ACCOUNT  WITH  A  LON- 
DON CORRESPONDENT 

A  Boston  bank  opens  an  account  with  a  London  corre- 
spondent and  purchases  drafts  for  immediate  remittance 
as  follows: 

1.  Demand  bill  for  £5,000  drawn  by  a  shoe  exporter 

at  4.09. 

2.  30-dajs'   sight  bill  for  £4,000  drawn  by  a  cotton 

manufacturer   at  4.07.     London   discount  rate   5 
per  cent. 

3.  60-days'  sight  bill  for  £2,500  drawn  by  a  woolen 

manufacturer  at  4.05^.     London  discount  rate  5 
per  cent. 

4.  90-days'  sight  bill  for  £3,000  drawn  by  a  candy  man- 

ufacturer at  4.03%.     London  discount  rate  5^/4 
per  cent. 

Drafts  sold  by  the  Boston  bank  are  as  follows : 

1.  Demand  bill  for  £2,000  at  4.10% 

2.  30-days'  sight  bill  for  £1,500  at  4.085 

3.  60-days'  sight  bill  for  £3,000  at  4.075 

4.  Remainder  in  demand  bill  at  4.11 

How  much  profit,  if  any,  has  the  Boston  bank  made  as 

a  result  of  these  transactions  before  any  allowance  has 

been  made  for  interest  earned  on  its  funds  or  commissions 

36 


A  LONDON  CO-RESPONDENT  37 

charged  to  its  customers?  An  acceptance  commission  of 
Ys  per  cent  on  30-  and  60-days'  sight  hills  drawn  by  the 
Boston  bank  is  to  be  allowed  to  the  London  correspondent.^ 
The  regular  English  stamp  charges  are  to  be  taken  into 
account.  Demand  drafts  and  bills  drawn  at  not  more 
than  3  days'  sight  require  a  2-pence  stamp,  no  matter  what 
the  amount.  Bills  drawn  payable  at  more  than  3  days 
after  sight  bear  a  stamp  tax  of  1/20  per  cent  or  a  shilling 
per  £100. 

The  solution  is  given  on  pages  38  and  39. 

1  Acceptance  commissions  charged  by  foreign  correspondents  on 
30-,  60-  and  90-day  sight  drafts  are  commonly  anywhere  from  1/16 
per  cent  to  %  per  cent.  A  refund  of  1/16  per  cent  is  sometimes 
allowed  if  an  acceptance  is  anticipated  30  days  or  more.  Some 
banks  may  have  to  pay  as  high  as  %  per  cent  ( %  per  cent  per 
month),  for  90-day  acceptances  by  their  foreign  correspondents. 


3174G8 


38      PROBLEMS  IN  FOREIGN  EXCHANGE 

SOLUTION 

Debits  to  London  Correspondent: 

Cost  Debits 

1.  Demand  bill   for   £5,000 

at  4.09    $20,450.00       £4,999  198  lOd 

Deduct  stamp  charges  2d 

2.  30-days'    sight    bill    for 

£4,000  at  4.07 16,280.00         3,979  18       4 

London  dis- 
count £18     Is     8d 

Stamp 
charges  2     0       0 

Total  de-      

ductions    £20     Is     8d 

3.  60-days'    sight    bill    for 

£2,500  at  4.0514 10,131.25         2,477     3       6 

London  dis- 
count        £21  lis     6d 

Stamp 
charges  15       0' 

Total  de-      

ductions     £22  16s     6d 

4.  9 0-day s'    sight    bill    for 

£3,000  at  4.03% 12,112.50         3,958     7       5 

London  dis- 
count £40     28     Td 

Stamp 
charges  1  10       0 

Total  de-  

ductions  £41  12s    7d 


Total  cost  and  total  debits..   $58,973.75     £14,415     9s     Id 


A  LONDON  CORRESPONDENT  39 

Credits  to  London  correspondent: 

Selling  Price  Credits 

1.  Demand  bill  for  £2,000 

at  4.103/4    $8,215.00      £2,000 

2.  SO-days'     sight    bill     for 

£1,500  at  4.085 6,127.50         1,500 

Acceptance     commission, 
Vs  per  cent 1  17s     6d 

3.  60-days'    sight    bill    for 

£3,000  at  4.075  12,225.00         3,000 

Acceptance     commission, 
%  per  cent 3  15       0 

4.  Demand   bill  for  £7,909 

16s  7d  at  4.11 32,509.40         7,909  16       7 

$59,076.90     £14,415     9s     Id 
Deduct  total  cost  of  drafts 

remitted   to   London. .     58,973.75 


Boston  bank's  profit    ...        $103.15 

The  Boston  bank's  profit  of  $103.15  does  not  include 
any  interest  that  may  have  been  received  from  balances 
with  its  London  correspondent.  Although  in  this  problem 
drafts  have  been  sold  for  the  total  of  the  credit  previously 
established  in  London,  two  of  the  drafts,  the  30-days' 
sight  bill  for  £1,500  and  the  60-days'  sight  bill  for  £3,000 
will  not  be  presented  to  the  London  correspondent  for 
payment  until  maturity.  In  the  meantime,  these  funds 
will  remain  available  to  the  Boston  bank,  which  may,  if 
it  wishes,  sell  them  by  way  of  a  demand  draft,  and  later 
cover  the  30-  and  60-days'  sight  bills  by  purchasing  de- 
mand drafts  or  cables. 


L.—  FINANCE  BILL  DRAWN  ON  A  LONDON  BANK 

As  contrasted  with  commercial  bills  whicli  arise  from 
the  importation  or  exportation  of  merchandise,  finance 
bills  have  as  their  origin  arrangements  made  between 
bankers  in  one  country  and  those  in  another  with  the 
object  of  raising  funds.  Finance  bills  are  commonly  used 
for  three  different  purposes;  first,  to  anticipate  a  fall  in 
foreign  exchange  prices;  second,  to  take  advantage  of  a 
situation  in  which  interest  rates  are  higher  in  one  country 
than  in  another;  and  third,  to  raise  funds  regardless  of 
the  conditions  of  interest  or  exchange.  It  is  the  object  of 
this  problem  to  point  out  how  advantage  may  be  taken  of 
a  situation  in  which  interest  rates  in  one  country  are  higher 
than  in  another. 

Assume  that  at  a  certain  time  the  interest  rates  for  call 
loans  are  abnormally  high  in  New  York,  without  a  corre- 
sponding condition  in  London.  A  New  York  banker  ar- 
ranges with  his  London  correspoaident  for  a  60-days' 
credit  of  £20,000,  by  pledging  sufficient  securities  for  the 
latter's  account  at  an  axxjeptable  New  York  depositary, 
although  very  often  in  such  cases  a  credit  is  extended 
without  any  collateral  requirements.  The  New  York 
banker  immediately  proceeds  to  draw  a  60-days'  sight  bill 
for  £20,000  on  his  London  correspondent.  He  may  convert 
this  draft  at  once  into  dollars,  either  by  selling  it  in  New 
York  at  the  market  rate  for  60-day  bills,  or  by  sending  it 

to  London  to  be  discounted  and  selling  his  own  demand 

40 


FINANCE  BILL  41 

drafts  against  the  proceeds  thus  placed  to  his  credit 
there. 

The  London  correspondent  will  not  be  called  upon  to 
loan  any  money  in  either  case,  but  simply  his  name.  The 
London  discount  market  will  provide  the  actual  funds. 

Suppose  that  the  New  York  banker  chooses  to  sell  his 
60-day  bill  outright.  In  order  to  show  how  much  profit 
he  might  make  as  a  result  of  the  whole  transaction,  let  us 
assume  that  the  conditions  are  as  follows : 

1.  New  York  rate  for  bankers'  60-day  bills  on  Lon- 

don, $4.84 

2.  Average  rate  of  interest  earned  by  New  York  banker 

through  loaning  proceeds  of  his  60-day  bill,  equiva- 
lent to  6  per  cent  per  annum  for  60  days. 

3.  At  end  of  60  days  New  York  banker  buys  a  sterling 

demand  draft  at  $4.85^  to  provide  the  necessary 
cover  in  London. 

4.  Commission  to  London  correspondent,  l/g  P^^  cent. 

COMPUTATION 

1.  Proceeds  of  60-days'  sight  bills  for  £20,000 

at  $4.84    $96,800.00 

2.  New  York  banker  employs  these  funds  for  60 

days  at  an  average  interest  rate  of  6  per  cent 

earning 968.00 

3.  Total  proceeds  and  interest $97,768.00 

4.  At  end  of  60  days  New  York  banker  buys  a 

sterling  demand  draft  for  £20,025  (£20,000 
plus  Ys  per  cent  commission)  for  remittance 
to  London  at  $4.85yo,  costing $97,221.38 

5.  New  York  banker's  profit $546.62 


42      PROBLEMS  IN  FOREIGN  EXCHANGE 

It  is  evident  that  if  the  New  York  banker  had  been 
able  to  provide  the  necessary  cover  for  the  original  draft 
on  his  London  correspondent  at  less  than  $4.8514,  he 
would  have  made  an  additional  profit,  and  that  if  the 
rate  went  much  above  4.851^,  he  would  have  suffered  a 
loss.  This  brings  into  the  transaction  ari  element  of 
speculation  which  the  New  York  banker  may  or  may  not 
wish  to  incur.  In  case  he  wishes  to  avoid  the  risk  he 
may  hedge  through  buying  exchange  for  future  delivery. 
Since  the  War  the  lack  of  stability  in  the  foreign  ex- 
change markets,  together  with  higher  interest  rates  abroad, 
have  caused  a  marked  decrease  in  the  drawing  of  finance 
bills. 

It  will  be  observed  that  neither  the  New  York  banker 
nor  his  correspondent  were  required  to  advance  any  money, 
since  the  London  discount  market  supplied  the  actual 
funds.  This  very  ready  means  of  raising  funds  might 
seem  to  be  open  to  serious  objections,  because  of  the  possi- 
bility of  its  being  easily  abused.  Any  danger  of  this  kind 
is  guarded  against  by  the  policy  of  the  London  discount 
market  of  keeping  closely  in  touch  with  the  position  of 
both  the  drawer  and  acceptor.  Higher  discount  rates 
and,  if  necessary,  the  refusal  to  take  the  paper  prove  the 
most  effective  checks  that  could  be  used  by  the  discount 
market  against  any  attempt  to  over-issue  finance  bills. 


M.— SALE  OF  FOREIGN  EXCHANGE  FOR  FUTURE 
DELIVERY  BY  AN  AMERICAN  MANUFAC- 
TURER 

In  January  a  Boston  shoe  manufacturer  accepts  an 
order  for  a  lot  of  shoes  amounting  to  1,000,000  francs 
for  shipment  to  France  before  the  following  April  15th. 
Fearing  that  a  fall  in  the  price  of  franc  drafts  in  April 
may  make  serious  inroads  into  his  profits,  he  arranges 
with  his  bankers  for  the  sale  to  them  for  delivery  in 
April  of  drafts  on  Paris  to  the  amount  of  1,000,000  francs 
at  the  rate  of  10  francs  to  the  dollar,  that  is  10  cents  a 
franc.  With  the  exchange  rate  thus  definitely  fixed  the 
shoe  manufacturer  has  protected  himself  from  any  loss 
that  he  may  incur  if  the  price  of  exchange  on  Paris  falls 
in  April  below  10  cents  a  franc,  and  at  the  same  time  he 
has  shut  out  the  possibility  of  any  speculative  profit  due 
to  exchange  rates  moving  the  other  way.  At  the  rate  of 
10  francs  to  a  dollar,  the  shoe  manufacturer  expects  to  be 
able  to  realize  the  required  merchandise  profit  from  the 
sale  of  his  goods. 

In  April,  when  the  shoes  are  ready  for  shipment,  the 
manufacturer  draws  a  draft  on  the  Paris  buyer  and  de- 
livers it  to  the  banker  to  whom  he  sold  the  April  exchange 
at  10  francs.  It  does  not  matter  whether  the  market  for 
francs  at  that  time  is  12  francs  or  8  francs  to  one  dollar, 
because  he  receives  for  his  million  francs  the  $100,000 
on  which  he  figured  when  he  sold  the  future  exchange. 

43 


44   PROBLEMS  IN  FOREIGN  EXCHANGE 

The  Boston  bankers  can  protect  themselves,  if  they 
wish,  either  by  selling  their  own  bills  to  fall  due  in  Paris 
in  April,  or  by  selling,  in  the  local  market,  franc  drafts 
for  April  delivery  to  importers  expecting  to  make  remit- 
tances at  that  time.  While  the  obligation  in  each  case  is 
the  same,  the  latter  alternative  involves  no  immediate 
money  transaction. 


N.— AEBITRAGING  m  FOREIGN  EXCHANGE 

Arbitrage  in  exchange  consists  essentially  in  buying 
drafts  in  one  place  at  a  low  price  and  selling  them  in 
another  place  at  a  high  price.  Fundamentally,  the 
process  does  not  differ  from  taking  advantage  of  the  dis- 
parity of  price  levels  for  the  same  commodity  in  different 
markets.  For  instance,  since  drafts  upon  France  are  be- 
ing sold  in  the  principal  cities  of  the  world,  it  might  be 
expected  that  there  would  be  one  rate  between  dollars 
and  francs  in  New  York  and  another  in  San  Francisco; 
or  that  the  rate  between  dollars  and  francs  would  differ, 
according  to  whether  the  exchanges  were  made  directly  on 
Paris  or  indirectly  through  the  medium  of  English 
pounds,  Italian  lire,  or  Spanish  pesetas.  It  is  the  pur- 
pose of  the  following  problem  to  show  that  there  are  al- 
ways forces  operating  to  establish  a  parity  in  price  quota- 
tions in  the  exchange  markets  throughout  the  world. 

Suppose  that  on  a  certain  date  cable  transfer  rates 
between  New  York,  London,  and  Paris  are  quoted  as 
follows : 

1.  Sterling  exchange  in  New  York 3.75 

2.  Bankers'  cables  in  New  York  on  Paris 7.75 

3.  London  cables  on  Paris   30.25 

A  foreign  exchange  trader  in  New  York  uses  $15,000 
to  purchase  sterling  exchange,  instructing  his  London  cor- 

45 


46      PROBLEMS  IN  FOREIGN  EXCHANGE 

respondent  to  use  the  funds  thus  forwarded  for  buying 
francs  to  be  remitted  to  a  Paris  correspondent.  At  $3.75 
per  pound  sterling,  $15,000  would  place  £4,000  to  the 
credit  of  the  New  York  foreign  exchange  trader  in  Lon- 
don. With  this  sum  of  English  money  the  London  cor- 
respondent would  buy  francs  at  the  rate  of  301/4  francs 
to  the  pound,  which  would  establish  in  Paris  a  credit  of 
121,000  francs  in  favor  of  the  Ne\\  York  foreign  ex- 
change trader.  The  latter  would  then  sell  in  New  York 
exchange  on  Paris  at  the  rate  of  7%  francs  for  a  dollar 
and  receive  from  the  sale  of  121,000  francs  the  sum  of 
$15,612.90.  But,  since  he  started  with  only  $15,000, 
this  rapid  trading  from  New  York  to  London  to  Paris 
and  back  to  New  York  again  has  yielded  a  profit  of 
$612.90,  less  brokerage  commissions  and  incidental  ex- 
penses. 

In  the  above  illustration  francs  are  cheaper  in  London 
than  in  New  York.  With  foreign  exchange  traders  all 
over  the  world  continually  on  the  alert  for  such  opportu- 
nities to  make  a  profit,  it  is  quite  evident  that  there  would 
result  immediate  speculative  buying  in  London  for  sale 
in  New  York.  The  result  of  this  would  be  to  increase 
the  buying  pressure  in  London  and  thus  cause  the  price 
for  francs  to  advance  in  England,  and  to  increase  the 
selling  pressure  in  New  York  and  so  reduce  the  price  of 
francs  in  the  United  States. 

This  would  tend  to  bring  about  a  parity  in  the  foreign 
exchange  quotations  in  New  York,  London,  and  Paris; 
that  is,  in  this  particular  instance,  it  would  establish  rates 
that  would  offer  no  opportunity  to  make  a  profit  through 


AEBITRAGING  IN  FOREIGN  EXCHANGE      47 

the  triangular  operation  of  buying  francs  in  London,  re- 
mitting them  to  Paris  for  credit,  and  selling  drafts  against 
this  credit  in  New  York.  It  is  evident  that  this  condi- 
tion could  be  created  as  a  result  of  a  change  in  one,  two, 
or  all  of  the  three  rates.  For  instance,  if  we  assume  the 
New  York  rate  on  London  to  continue  at  3.75  and  the 
New  York  rate  on  Paris  to  remain  at  7.75,  the  London 
parity  rate  on  Paris  would  be  29.06  francs  per  pound 
(3.75  X  7.75).  Similarly,  if  we  assume  the  London  rate 
on  Paris  and  the  New  York  rate  on  Paris  to  remain  un- 
changed, the  New  York  parity  rate  on  London  would  bo 
3.90  (30.25 -f- 7.75).  Finally,  if  we  assume  the  Lon- 
don rate  on  Paris  and  the  New  York  rate  on  London  to 
remain  unchanged,  the  New  York  parity  rate  on  Paris 
would  be  8.07  francs  per  dollar  (30.25-^3.75).  Prac- 
tically speaking,  instead  of  a  parity  being  established 
solely  by  a  change  in  the  rate  in  any  one  market,  changes 
in  the  rates  in  each  of  the  markets  might  ordinarily  be 
expected  to  occur,  bringing  about,  of  course,  the  same 
final  results. 

Besides  speculation  there  is  another  important  class  of 
arbitrage  transactions,  which  also  tends  to  equalize  foreign 
exchange  prices  in  the  various  financial  centers  of  the 
world.  For  instance,  let  us  suppose  a  New  York  im- 
porter is  about  to  make  a  remittance  to  Rome.  The 
simplest  way  would  be  to  send  the  money  directly  to 
Italy.  However,  if  the  exchange  rates  make  it  possible 
to  buy  lire  cheaper  in  London  than  in  New  York,  the 
New  York  importer  might  find  it  profitable  to  change  his 
dollars  into  pounds,  and,  with  this  English  money,  buy 


48      PROBLEMS  IN  FOREIGN  EXCHANGE 

lire  in  the  London  market  for  remittance  to  Rome.  Both 
speculative  dealings  and  indirect  remittances  in  foreign 
exchange  have  an  important  economic  function  in  equal- 
izing exchange  rates,  and  thus  making  it  possible  for  the 
financial  machinery  of  international  trade  to  operate  more 
smoothly. 

While  the  above  problem  illustrates  an  arbitrage  trans- 
action involving  three  different  markets,  not  infrequently 
it  is  possible  for  foreign  exchange  traders  to  make  a  profit 
through  operating  in  four  or  more  markets.  However,  it 
must  be  borne  in  mind  that  operations  of  this  latter  kind 
carry  with  them  greater  elements  of  risk  and  are  more 
expensive  on  account  of  extra  commissions,  cable  charges, 
and  other  incidental  items. 


0.—  FINANCING  THE  TRAVELER  ABROAD  BY  LET< 
TER  OF  CREDIT 

Just  as  commercial  letters  of  credit  provide  the  mer- 
chant with  a  suitable  means  of  financing  his  business 
transactions  successfully,  the  travelers'  letter  of  credit 
enables  the  tourist  or  traveler  to  carry  funds  abroad  con- 
veniently,  inexpensively,   and   with   safety. 

Suppose  that  Henry  Mack  of  Chicago  is  planning  a  tour 
around  the  world  and  has  decided  to  carry  the  funds  for 
his  trip  in  the  form  of  a  travelers'  letter  of  credit.  Hav- 
ing estimated  his  expenses  at  about  $4,000,  he  applies  to 
his  local  bank  for  what  is  known  as  a  circular  letter  of 
credit,  good  for  approximately  this  sum  of  money.  The 
bank  will  very  likely  advise  its  customer  to  take  a  letter 
of  credit  drawn  in  sterling,  that  is  authorizing  drafts  on 
a  London  correspondent,  because  sterling  drafts  are  usually 
more  easily  negotiated  than  those  drawn  in  other  cur- 
rencies. 

Upon  receipt  of  the  letter  of  credit,  Henry  Mack  will 
be  required  by  his  bank  either  to  pay  cash  in  advance  or 
to  sign  an  agreement  to  make  payment  later.  Assuming 
that  he  chooses  the  former  plan,  he  will  be  charged  for 
the  full  face  value  of  the  letter  of  credit  at  the  "  posted 
rates  "  (rates  asked  by  bankers  for  checks  and  letters  of 
credit  sold  in  small  lots)  for  sterling  exchange.  If  the 
rate  charged  by  the  bank  were  $4.00  per  pound  sterling, 
Henry  Mack  would  obviously  pay  $4,000  for  a  letter  of 

49 


50      PKOBLEMS  IN  FOREIGN  EXCHANGE 

credit  for  1,000  pounds.  Whether  or  not  he  would  be 
required  to  pay  the  bank  a  commission,  or  how  much  the 
commission  would  be,  in  case  of  a  charge  of  this  kind,  is 
purely  a  question  for  the  bank  to  decide  and  is  a  matter 
concerning  which  there  is  no  uniform  practice.  Very 
likely,  if  the  bank  makes  no  formal  commission  charge,  the 
compensation  for  rendering  the  service  has  been  figured 
in  the  net  price  the  customer  has  to  pay. 

Henry  Mack  now  has  an  instrument  addressed  by  his 
bank  as  a  circular  letter  to  its  correspondents  in  various 
parts  of  the  world,  informing  them  that  the  holder  or 
beneficiary  is  authorized  to  draw  sight  drafts  up  to  1,000 
pounds  sterling  on  a  certain  designated  bank  in  London, 
as  for  example,  the  Union  Bank  of  Canada,  Ltd. 

The  Chicago  bank  will  also  give  Henry  Mack  with  the 
letter  of  credit  a  second  document  known  as  a  "  letter  of 
indication  "  and  will  advise  its  customer  to  keep  this  latter 
document  apart  from  the  letter  of  credit,  as  an  additional 
factor  of  safety. 

The  Chicago  bank  will  have  previously  furnished  its 
various  correspondents  with  specimen  signatures  of  the 
officers  authorized  to  issue  letters  of  credit  or  send  advices 
on  its  behalf.  Each  correspondent  applied  to  for  funds 
will  judge  of  the  genuineness  of  the  traveler's  claim  by 
requiring  him  to  duplicate  a  specimen  signature  placed 
upon  the  letter  of  credit  at  the  time  of  issue,  or  the  same 
signature  upon  a  separate  letter  of  indication. 

When  in  need  of  money  at  any  point  in  his  journey, 
such  as  Paris,  for  example,  Henry  Mack  will  call  upon 
the  local  correspondent  of  his  Chicago  bank  and  will  be 


TRAVELERS'  LETTER  OF  CREDIT    51 

supplied  with  funds  immediately.  The  Paris  banker  to 
whom  Henry  Mack  applies  will  request  that  he  sign  a 
draft  on  the  Union  Bank  of  Canada,  Ltd.,  for  the  amount 
he  desires  to  draw.  The  number  of  francs  obtainable 
per  pound  for  this  draft  will  depend  on  the  Parisian 
banker's  buying  rate  for  this  type  of  bill.  If  the  rate 
quoted  is  28.00  francs  per  pound,  the  cost  of  francs  in 
dollars  would  be  computed  as  follows: 

French  banker^s  buying  rate  28.00  francs  per  £ 

Cost  in  dollars  of  £1  of  the  credit $4.00 

Cost  in  dollars  of  the  28.00  francs  obtained  from  £1  $4.00 

Cost  of  1  frauc 0.1429 

Number  of  French  units  obtained  for  $1.00  ....   7.00  francs 

Before  the  transaction  with  the  Paris  banker  is  con- 
cluded, the  latter  will  record  on  an  appropriate  page  of 
the  letter  of  credit  the  draft  that  has  just  been  drawn. 
When  the  last  draft  exliausts  the  letter  of  credit,  the 
letter  will  be  retained  by  the  bank  cashing  it  and  then 
forwarded,  together  with  the  draft  to  be  surrendered,  to 
the  drawee  bank. 

The  Paris  banker  will  now  forward  the  draft  to  his 
London  correspondent,  say  Harrods  Bank,  who  will  pre- 
sent it  immediately  to  the  Union  Bank  of  Canada,  Ltd., 
for  payment.  The  Union  Bank  of  Canada,  Ltd.,  after 
paying  the  draft,  will  charge  the  account  of  its  Chicago 
banking  correspondent  and  will  forward  to  that  bank  either 
the  cancelled  draft  or  a  statement  of  advice.  If  Henry 
Mack  had  not  paid  cash  in  advance  for  the  letter  of  credit, 
the  Chicago  bank  would  now  convert  the  draft  into  dollars 


52      PROBLEMS  IN  FOREIGN  EXCHANGE 

and  charge  his  account  at  the  "  posted  rates  "  for  sterling 
exchange,  to  provide  the  necessary  cover  in  London. 

FOBM    5.      CIBCtrLAE   LETTEB  OF   CREDIT 

CENTRAL  STATES  TRUST  COMPANY 

CiRCULAH  Letter  of  Credit 

No.  OOOOO  Amount,  £1,000. 

Chicago,  Illinois,  April  1, 1920. 
To  Messrs.  the  Banks  and  Bankers 
Mentioned  on  the  accompanying  list  of  correspondents : 
Gentlemen  : 

We  beg  to  introduce  to  you  the  bearer  of  this  letter,  Mr. 
Henry  Mack  of  Chicago,  in  whose  favor  we  have  opened  a  credit 
for  One  Thoiisand  Pounds  Sterling,  with  The  Union  Bank  of 
Canada,  Ltd.,  London,  to  be  in  force  until  January  1st,  1921. 

We  request  you  to  negotiate demand  drafts  on 

the  above  mentioned  firm  bearing  the  clause  drawn  against  L. 
of  C.  No.  OOOOO  of  Central  States  Trust  Company  of  Chicago 
on  the  most  favorable  terms,  deducting  all  your  charges  and 
endorsing  all  payments  on  the  second  page  in  the  same  currency 
in  which  this  credit  is  issued. 

Recommending  M'r.  Mack  to  your  best  attention, 
We  remain,  Gentlemen, 

Yours  truly. 
Central  States  Trust  Company 
Signature  of  bearer  of  this  letter  of 
credit  will  be  found  on  accompany- 
ing letter  of  indication. 

Please  return  this  letter  to  us  after  the  last  payment  has  been 
made. 

If  at  the  end  of  his  trip  Henry  Mack  has  not  exhausted 
his  letter  of  credit,  he  will  surrender  it  to  his  bank  for 
cancellation  and  the  amount  of  the  unused  portion  left, 
after  deducting  his  various  drafts,  will  be  refunded  to 
him. 


p.— TEAVELERS'  CHECKS 

Travelers'  checks  are  commonly  issued  in  the  United 
States  in  denominations  of  $10,  $20,  $50,  and  $100. 
Not  only  can  they  be  cashed  at  the  leading  banks  in  the 
United  States  and  foreign  countries,  but  they  are  readily 
accepted  at  the  principal  railroad  ticket  offices,  at  hotels, 
tourist  bureaus,  and  business  houses.  They  are  practi- 
cally as  convenient  as  currency  and  at  the  same  time  afford 
security  against  loss. 

The  travelers'  check  bears  a  specimen  signature  of  the 
purchaser  which  he  is  required  to  place  upon  it  at  the 
time  of  purchase.  At  the  time  of  encashment,  the  payee 
is  required  to  countersign  the  check  in  the  presence  of  the 
person  accepting  it.  The  ability  of  the  payee  to  dupli- 
cate his  original  signature  serves  to  identify  the  holder. 
Checks  have  no  value  without  the  second  signature. 
Thieves  or  finders  of  checks  are  not  disposed  to  assume 
the  risk  of  forging  the  owner's  signature  in  the  presence 
of  the  person  paying  them.  In  case  of  loss,  the  bank  or 
company  of  issuance,  having  received  proper  notification, 
will  stop  payment  upon  the  checks  and  refund  the  full 
face  value  when  suitable  indemnity  has  been  furnished. 

Until  recently  (1920)  travelers'  checks  have  been  issued 
with  the  amount  of  foreign  currencies  at  which  they  were 
payable  abroad  indicated  on  the  face  of  the  instrument 
Previous  to  the  War  this  was  a  convenient  arrangement  for 

63 


54      PROBLEMS  IN  FOREIGN  EXCHANGE 

the  holder,  but  the  subsequent  disorganization  of  the  for- 
eign exchanges  made  unsatisfactory  the  travelers'  check 
payable  in  a  fixed  and  invariable  amount  of  foreign  cur- 
rency. At  present  some  institutions  are  making  their 
checks  payable  abroad  at  the  best  rate  ruling  for  exchange 
on  New  York  on  the  day  of  payment. 

FOBM    6.      XBAVELEB'S    CHOCK 

Holder's  Signature                                                                 No.  603800 
19.... 

OCEANIC  NATIONAL  BANK  OF  NEW  YORK 

Broadway,  New  York, 
or  its  Paying  Agents 

Will  pay  to  the  order  of   

T      TT  -i    1    <~.i  i  J    /-I       J  In   other   countries 

When  signed  below  by  the  person  whose  signature  appears  above 

The  holder  must  sign  here  in  By  Heney  C.  Atkinson, 

presence  of  paying  ofiBcer.  President. 

The  standard  terras  under  which  these  checks  are  sold 
in  this  country  are  their  face  value  in  dollars,  plus  a  com- 
mission of  one-half  of  1  per  cent,  or  50  cents  per  $100 
worth.  In  some  cases  there  is  a  minimum  commission  of 
50  cents. 


PART  II 
PROBLEMS 


SOUECfES  OF  SUPPLY  AND  DEMAND 

1 

Chart  the  actual  rates  of  sight  bills  of  sterling  exchange 
in  New  York  for  any, year  previous  to  the  War.  Anno- 
tate the  chart  to  explain  significant  fluctuations  in  the 
price  quotations.  In  constiTicting  the  chart  observe  the 
following  points: 

1.  Source  of  Data. —  The  Financial  Review.     For  ac- 

tual rates  turn  to  the  contents  for  topic  "  Foreign 
Exchange — Daily  Prices  in  New  York."  Infor- 
mation for  annotating  chart  will  be  found  at  the 
beginning  of  The  Financial  Review  in  the  section 
entitled  "  Retrospect."  In  this  section  there  is  a 
paragraph  under  the  heading  "  Foreign  Exchange  " 
for  each  month. 

2.  Base  Line. — Par  of  exchange.     Draw  a  heavy  hori- 

zontal line  in  the  middle  of  the  paper  and  let 
this  represent  the  par  of  exchanga  Plot  price 
quotations  so  that  the  constructed  curve  will  meas- 
ure the  deviations  from  this  base  line. 

3.  Price  Quotations  to  he  Used. — Monday  quotations. 

Plot  both  the  high  and  the  low  rates  using  Mon- 
day quotations  only. 

67 


58      PEOBLEMS  IN  FOEEIGN  EXCHANGE 

2 

Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  of  sight  bills  of  sterling  exchange 
in  New  York  for  the  most  recent  year  for  which  quota- 
tions are  available. 

3 

Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  checks 
on  Paris  for  1914.  The  daily  quotations  may  be  found 
in  The  Financial  Review  for  1919  under  the  heading, 
"  Daily  Rates  of  Exchange  on  Continental  Centers  for 
Five  Years." 

4 

Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  checks  on 
Paris  for  the  most  recent  year  for  which  quotations  are 
available. 

5 

Constinict  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  sight  bills 
on  Berlin  for  1914.  The  daily  quotations  may  be  found 
in  The  Financial  Review  for  1919  under  the  heading, 
"  Daily  Rates  of  Exchange  on  Continental  Centers  for 
Five  Years." 

6 

Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  sight  bills 
on  Berlin  for  the  most  recent  year  for  which  quotations 
are  available. 


SOUKCES  OF  SUPPLY  AND  DEMAND      59 

7 

Classify  and  briefly  describe  the  different  sources  from 
which  practically  all  the  demand  for  foreign  exchange 
originates. 

8 
Classify  and  briefly  describe  the  different  sources  from 
which  practically  all  the  supply  of  foreign  exchange  or- 
iginates. 

9 
How  would  you  expect  the  rates  of  sterling  exchange 
in  New  York  to  be  affected  by : 

(a)   Flotation    of    large    British    loan    in    the    United 

States  ? 
(6)   Failure  of  the  American  cotton  and  wheat  crops? 

(c)  Great  increase  in  output  of  American  gold  mines? 

(d)  Rapid    development    of    an    American    merchant 
marine  ? 

(e)  Increased  importations  of  coffee  from  Brazil? 
(/)   A  large  European  war? 

(g)  A  financial  panic  in  New  York? 

(h)   Increase  of  American  tourists  in  Europe? 

10 

Explain  what  is  meant  by  the  interdependence  of  ex- 
ports and  imports. 

11 

Prepare  a  tabulation  showing  total  exports,  total  im- 
ports, export  balance,  if  any,  import  balance,  if  any,  for 
the  United  States,  the  United  Kingdom,  France,  and 
Germany,    for   each   of   the   vears    1909-1913    inclusive. 


60     PEOBLEMS  IK  FOEEIGK  EX(IEIA:NGE 

(Among  other  references  see  the  Statistical  Abstract  of 
Foreign  Countries.) 

(a)  Does  this  tabulation  bear  out  your  answer  to  Prob- 
lem 10  ?     If  not  explain  further. 

(b)  Do  the  figures  in  the  tabulation  show  the  same 
tendencies  for  each  individual  country?  How  do  you 
account  for  this? 

12 

The  term  "  balance  of  trade  "  refers  generally  to  the 
amount  by  which  the  physical  exports  of  a  given  nation 
exceed  its  physical  imports.  The  reason  for  the  so-called 
balance  of  trade  is  that  nations,  like  individuals,  are  con- 
stantly buying  from  each  other  services  as  well  as  physical 
objects.  In  other  words,  there  arises  what  are  known  as 
"  invisible  exports  "  and  "  invisible  imports." 

Prepare  a  tabulation  showing  precisely  what  the  United 
States  imports  and  what  it  exports  in  case  of: 

1.  Purchase  of  European  securities 

2.  Receipt    of    interest    and    dividends    on    European 

securities 

3.  Sale  of  American  securities  in  Europe 

4.  Payment   of   interest   and   dividends   on    American 

securities  held  in  Europe 

5.  Payment  of  ocean  freight  charges  to  English  steam- 

ship companies 

6.  Payment  of  marine  insurance  charges  to  English 

companies 

7.  Wealthy  x\mericans  marrying  titled  foreigners 

8.  Immigrants'  wages  remitted  to  the  "  old  country  " 


SOURCES  OF  SUPPLY  AND  DEMAND      61 

9.  Payment    of   commissions    to    English   brokers    by 
American  customers  for  sale  of  securities  abroad 

10.  American  tourists  travelling  abroad 

11.  Foreign  tourists  travelling  in  the  United  States. 

13 

(Exclusive  to  The  Joubtax  of  Comvebce) 
NEW  YORK,  June  4,  1920.—  The  feature  of  the  foreign 
exchange  market  to-day  was  the  heavy  buying  of  German  ex- 
change on  London  account,  marks  cables  advancing  from 
2.22  to  2.43.  Sterling  was  heavy,  declining  li^  cents  to 
3.89%  for  demand. 

Explain  in  simple  language  the  significance  of  buying 
of  German  exchange  on  Tx)ndon  account. 

14 

(Exclusive  to  The  JouBs^Ai  of  Commebce) 
NEW  YORK,  April  21,  1920.—  Sterling  was  steady  at  a 
slight  decline  during  the  forenoon  to-day,  but  after  mid- 
day there  was  sudden  pressure  causing  demand  to  decline  to 
3.921/4,  a  loss  of  2%  cents.  It  was  stated  by  some  of  the 
dealers  that  this  supply  represented  sales  for  Japanese 
account  and  was  connected  with  the  financial  crisis  now  pre- 
vailing in  Japan. 

Explain  fully  the  meaning  of  the  above  quotation. 

15 

In  discussing  the  effects  of  high  interest  rates,  Goschen, 
in  his  book  The  Theory  of  the  Foreign  Exchanges  states 
that: 


'62      PROBLEMS  IN  FOREIGN  EXCHANGE 

"We  accordingly  may  conclude  that  what  is  technically  called 
a  stringent  money-market,  acts  materially  upon  the  exchanges, 
inducing  sellers  to  force  sales,  and  creating  a  reluctance  on 
the  part  of  purchasers  to  buy  unless  absolutely  compelled  to 
remit.  This  cause  will,  however,  not  come  forcibly  into  oper- 
ation, when  the  international  transactions  are  in  a  state  of 
equilibrium;  for  then  there  will  be  as  many  purchasers  on 
compulsion  as  there  are  sellers,  and  the  dearness  of  money 
may  only  operate  so  far  as  to  induce  purchasers  to  defer  their 
remittances  to  the  last  moment,  whereas  sellers  would  wish 
that  they  should  be  hastened.  Its  full  force  will  be  felt  at  a 
time  when  the  country  where  money  is  supposed  to  be  dear, 
or  where  panic  exists,  has  exported  more  than  it  has  imported, 
and  when  it  is  consequently  certain  that  gold  will  finally  have 
to  be  ordered,  while  no  individual  is  himself  willing  to  wait 
for  its  arrival. 

Develop  the  above  explanation  at  greater  length. 


II 

PAE  OF  EXCHANGE 

16 
Prepare  a  tabulation  showing: 

1.  Xames  of  ten  principal  countries  whose  currency 

is  on  a  gold  basis ; 

2.  Names  of  monetary  unit; 

3.  Xames  of  subdivisions  of  monetary  unit; 

4.  Kumber  of  grains  of  pure  gold  in  monetary  unit; 

5.  Dollar  equivalent  of  monetary  unit  or  par  of  ex- 

change with  the  United  States. 

17 

From  the  above  tabulation  explain  how  par  of  exchange 
is  determined  between  the  United  States  and  other 
countries  on  a  gold  basis. 

18 

Prepare  a  tabulation  showing  how  the  par  of  exchange 
is  determined  in  London  on  New  York,  Paris,  Berlin, 
Rome,  ^Madrid,  and  Amsterdam.  Give  the  quotations 
in  English  money. 

19 

Prepare  a  tabulation  showing  how  the  par  of  exchange 
is  determined  in  Paris  on  New  York,  London,  Berlin, 

63 


64      PROBLEMS  IN  FOREIGN  EXCHANGE 

Rome,  Madrid,  and  Amsterdam.     Give  the  quotations  ia 
French  money. 

20 
Prepare  a  tabulation  showing  how  the  par  of  exchange 
is  determined  in  Berlin  on  New  York,  London,  Paris, 
Rome,  Madrid,  and  Amsterdam.     Give  the  quotations  in 
German  money. 

21 
Prepare  a  tabulation  showing: 

1.  Names  of  principal  countries  whose  currency  is  on 

a  silver  basis; 

2.  Names  of  monetary  unit ; 

3.  Names  of  subdivisions  of  monetary  units; 

4.  Number  of  grains  of  pure  silver  in  the  monetary 

unit ; 

5.  Most  recent  available  quotation  on  the  price  of  sil- 

ver bullion  per  ounce  in  the  New  York  market ; 

6.  Dollar  equivalent  of  monetary  unit  or  momentary  par 

of  exchange  with  the  United  States  at  the  above 
price  of  silver  bullion. 

22 
From  the  above  tabulation  explain  how  the  momentary 
par  of  exchange  is  determined  between  the  United  States 
and  countries  on  a  silver  basis.  By  the  momentary  par  of 
exchange  is  here  meant  the  relative  par  of  exchange,  that 
is,  the  one  that  is  based  upon  the  market  value  of  the  bul- 
lion contents  of  the  monetary  units  of  the  oountriea  in 
question  at  a  particular  instant. 


0.—  FINANCING  THE  TRAVELER  ABROAD  BY  LET. 
TER  OF  CREDIT 

Just  as  commercial  letters  of  credit  provide  the  mer- 
chant with  a  suitable  means  of  financing  his  business 
transactions  successfully,  the  travelers'  letter  of  credit 
enables  the  tourist  or  traveler  to  carry  funds  abroad  con- 
veniently,  inexpensively,   and  with   safety. 

Suppose  that  Henry  Mack  of  Chicago  is  planning  a  tour 
around  the  world  and  has  decided  to  carry  the  funds  for 
his  trip  in  the  form  of  a  travelers'  letter  of  credit.  Hav- 
ing estimated  his  expenses  at  about  $4,000,  he  applies  to 
his  local  bank  for  what  is  known  as  a  circular  letter  of 
credit,  good  for  approximately  this  sum  of  money.  The 
bank  will  very  likely  advise  its  customer  to  take  a  letter 
of  credit  drawn  in  sterling,  that  is  authorizing  drafts  on 
a  London  correspondent,  because  sterling  drafts  are  usually 
more  easily  negotiated  than  those  drawn  in  other  cur- 
rencies. 

Upon  receipt  of  the  letter  of  credit,  Henry  Mack  will 
be  required  by  his  bank  either  to  pay  cash  in  advance  or 
to  sign  an  agreement  to  make  payment  later.  Assuming 
that  he  chooses  the  former  plan,  he  will  be  charged  for 
the  full  face  value  of  the  letter  of  credit  at  the  "  posted 
rates  "  (rates  asked  by  bankers  for  checks  and  letters  of 
credit  sold  in  small  lots)  for  sterling  exchange.  If  the 
rate  charged  by  the  bank  were  $4.00  per  pound  sterling, 
Henry  Mack  would  obviously  pay  $4,000  for  a  letter  of 

49 


50      PROBLEMS  IN  FOREIGN  EXCHANGE 

credit  for  1,000  pounds.  Whether  or  not  he  would  be 
required  to  pay  the  bank  a  commission,  or  how  much  the 
commission  would  be,  in  case  of  a  charge  of  this  kind,  is 
purely  a  question  for  the  bank  to  decide  and  is  a  matter 
concerning  which  there  is  no  uniform  practice.  Very 
likely,  if  the  bank  makes  no  formal  commission  charge,  the 
compensation  for  rendering  the  service  has  been  figured 
in  the  net  price  the  customer  has  to  pay. 

Henry  Mack  now  has  an  instrument  addressed  by  his 
bank  as  a  circular  letter  to  its  correspondents  in  various 
parts  of  the  world,  informing  them  that  the  holder  or 
beneficiary^  is  authorized  to  draw  sight  drafts  up  to  1,000 
pounds  sterling  on  a  certain  designated  bank  in  London, 
as  for  example,  the  Union  Bank  of  Canada,  Ltd. 

The  Chicago  bank  will  also  give  Henry  Mack  with  the 
letter  of  credit  a  second  document  known  as  a  "  letter  of 
indication  "  and  will  advise  its  customer  to  keep  this  latter 
document  apart  from  the  letter  of  credit,  as  an  additional 
factor  of  safety. 

The  Chicago  bank  will  have  previously  furnished  its 
various  correspondents  with  specimen  signatures  of  the 
officers  authorized  to  issue  letters  of  credit  or  send  advices 
on  its  behalf.  Each  correspondent  applied  to  for  funds 
will  judge  of  the  genuineness  of  the  traveler's  claim  by 
requiring  him  to  duplicate  a  specimen  signature  placed 
upon  the  letter  of  credit  at  the  time  of  issue,  or  the  same 
signature  upon  a  separate  letter  of  indication. 

When  in  need  of  money  at  any  point  in  his  journey, 
such  as  Paris,  for  example,  Henry  Mack  will  call  upon 
the  local  correspondent  of  hia  Chicago  bank  and  will  be 


TRAVELERS'  LETTER  OF  CREDIT         51 

supplied  with  funds  immedintuly.  The  Paris  banker  to 
whom  Henry  Mack  applies  will  request  that  he  sign  a 
draft  on  the  Union  Bank  of  Canada,  Ltd.,  for  the  amount 
he  desires  to  draw.  The  number  of  francs  obtainable 
per  pound  for  this  draft  will  depend  on  the  Parisian 
banker's  buying  rate  for  this  type  of  bill.  If  the  rate 
quoted  is  28.00  francs  per  pound,  the  cost  of  francs  in 
dollars  would  be  computed  as  follows: 

French  banker's  buying  rate 28.00  francs  per  £ 

Cost  in  dollars  of  £1  of  the  credit $4.00 

Cost  in  dollars  of  the  28.00  francs  obtained  from  £1  $4.00 

Cost  of  1  franc 0.1429 

Number  of  French  units  obtained  for  $1.00 7.00  francs 

Before  the  transaction  with  the  Paris  banker  is  con- 
cluded, the  latter  will  record  on  an  appropriate  page  of 
the  letter  of  credit  the  draft  that  has  just  been  drawn. 
When  the  last  draft  exhausts  the  letter  of  credit,  the 
letter  will  be  retained  by  the  bank  cashing  it  and  then 
forwarded,  together  with  the  draft  to  be  surrendered,  to 
the  drawee  bank. 

The  Paris  banker  will  now  forward  the  draft  to  his 
London  correspondent,  say  Harrods  Bank,  who  will  pre- 
sent it  immediately  to  the  Union  Bank  of  Canada,  Ltd., 
for  payment.  The  Union  Bank  of  Canada,  Ltd.,  after 
paying  the  draft,  will  charge  the  account  of  its  Chicago 
banking  correspondent  and  will  forward  to  that  bank  either 
the  cancelled  draft  or  a  statement  of  advice.  If  Henry 
Mack  had  not  paid  cash  in  advance  for  the  letter  of  credit, 
the  Chicago  bank  would  now  convert  the  draft  into  dollars 


52      PROBLEMS  IN  FOREIGN  EXCHANGE 

and  charge  his  account  at  the  "  posted  rates  "  for  sterling 
exchange,  to  provide  the  necessary  cover  in  London. 

FOBM    5.      CrBCUIAB   LETTEB  OF   CBEDIT 

CENTRAL  STATES  TRUST  COMPANY 

CiRCULAK  Letter  of  Credit 

No.  00000  Amount,  £1,000. 

Chicago,  Illinois,  April  1, 1920. 
To  Messrs.  the  Banks  and  Bankers 
Mentioned  on  the  accompanying  list  of  correspondents ; 
Gentlemen  : 

We  beg  to  introduce  to  you  the  bearer  of  this  letter,  Mr. 
Henry  Mack  of  Chicago,  in  whose  favor  we  have  opened  a  credit 
for  One  Thousand  Pounds  Sterling,  with  The  Union  Bank  of 
Canada,  Ltd.,  London,  to  be  in  force  until  January  1st,  1921. 

We  request  you  to  negotiate demand  drafts  on 

the  above  mentioned  firm  bearing  the  clause  drawn  against  L. 
of  C.  No.  00000  of  Central  States  Trust  Company  of  Chicago 
on  the  most  favorable  terms,  deducting  all  your  charges  and 
endorsing  aU  payments  on  the  second  page  in  the  same  currency 
in  which  this  credit  is  issued. 

Recommending  Mr.  Mack  to  your  best  attention. 
We  remain.  Gentlemen, 

Yours  truly. 
Central  States  Trust  Company 
Signature  of  bearer  of  this  letter  of  • 

credit  will  be  found  on  accompany- 
ing letter  of  indication. 

Please  return  this  letter  to  us  after  the  last  payment  has  been 
made. 

If  at  the  end  of  his  trip  Henry  Mack  has  not  exhausted 
his  letter  of  credit,  he  v^ill  surrender  it  to  his  bank  for 
cancellation  and  the  amount  of  the  unused  portion  left, 
after  deducting  his  various  drafts,  will  be  refunded  to 
him, 


p.— TRAVELERS'  CHECKS 

Travelers'  cheeks  are  commonly  issued  in  the  United 
States  in  denominations  of  $10,  $20,  $50,  and  $100. 
Not  only  can  they  be  cashed  at  the  leading  banks  in  the 
United  States  and  foreign  countries,  but  they  are  readily 
accepted  at  the  principal  railroad  ticket  offices,  at  hotels, 
tourist  bureaus,  and  business  houses.  They  are  practi- 
cally as  convenient  as  currency  and  at  the  same  time  afford 
security  against  loss. 

The  travelers'  check  bears  a  specimen  signature  of  the 
purchaser  which  he  is  required  to  place  upon  it  at  the 
time  of  purchase.  At  the  time  of  encashment,  the  payee 
is  required  to  countersign  the  check  in  the  presence  of  the 
person  accepting  it.  The  ability  of  the  payee  to  dupli- 
cate his  original  signature  serves  to  identify  the  holder. 
Checks  have  no  value  without  the  second  signature. 
Thieves  or  finders  of  checks  are  not  disposed  to  assume 
the  risk  of  forging  the  owner's  signature  in  the  presence 
of  the  person  paying  them.  In  case  of  loss,  the  bank  or 
company  of  issuance,  having  received  proper  notification, 
will  stop  payment  upon  the  checks  and  refund  the  full 
face  value  when  suitable  indemnity  has  been  furnished. 

Until  recently  (1920)  travelers'  checks  have  been  issued 
with  the  amount  of  foreign  currencies  at  which  they  were 
payable  abroad  indicated  on  the  face  of  the  instrument 
Previous  to  the  War  this  was  a  convenient  arrangement  for 

63 


54   PROBLEMS  IN  FOREIGN  EXCHANGE 

the  holder,  but  the  subsequent  disorganization  of  the  for- 
eign exchanges  made  unsatisfactory  the  travelers'  check 
payable  in  a  fixed  and  invariable  amount  of  foreign  cur- 
rency. At  present  some  institutions  are  making  their 
checks  payable  abroad  at  the  best  rate  ruling  for  exchange 
on  New  York  on  the  day  of  payment. 

FOBM    6.      TBAVELEB'S    CHOCK 

Holder's  Signature                                                                 No.  603800 
19 

OCEANIC  NATIONAL  BANK  OF  NEW   YORK 

Broadway,  New  York, 
or  its  Paying  Agents 

Will  pay  to  the  order  of   

T      TT  -i.  J    oi  i  J    n       A  In   other  countries 

:^EN^  DOLLARS  -  $20  00  A^  ^^"^"^  ^^^^"^  ^«^^«  «^  ^^^^^°g« 
iWEX^lY    UOLLAKfe  —  !t.^U.UU  ^^^  Checks  on  New  York 

When  signed  below  by  the  person  whose  signature  appears  above 

The  holder  must  sign  here  in  By  Henry  C.  Atkinson, 

presence  of  paying  oflBcer.  President. 

The  standard  terms  under  which  these  checks  are  sold 
in  this  country  are  their  face  value  in  dollars,  plus  a  com- 
mission of  one-half  of  1  per  cent,  or  50  cents  per  $100 
worth.  In  some  cases  there  is  a  minimum  commission  of 
50  cents. 


PART   II 
PROBLEMS 


SOURCES  OF  SUPPLY  AND  DEMAND 

1 

Chart  the  actual  rates  of  sight  billa  of  sterling  exchange 
in  New  York  for  any  year  previous  to  the  War.  Anno- 
tate the  chart  to  explain  significant  fluctuations  in  the 
price  quotations.  In  constructing  the  chart  observe  the 
following  points: 

1.  Source  of  Data. —  The  Financial  Review.     For  ac- 

tual rates  turn  to  the  contents  for  topic  "  Foreign 
Exchange — Daily  Prices  in  New  York."  Infor- 
mation for  annotating  chart  will  be  found  at  the 
beginning  of  The  Financial  Review  in  the  section 
entitled  "  Retrospect."  In  this  section  there  is  a 
paragraph  under  the  heading  "  Foreign  Exchange  " 
for  each  mouth. 

2.  Base  Line. — Par  of  exchanga     Draw  a  heavy  hori- 

zontal line  in  the  middle  of  the  paper  and  let 
this  represent  the  par  of  exchange.  Plot  price 
quotations  so  that  the  constructed  curve  will  meas- 
ure the  deviations  from  this  base  line. 

3.  Price  Quotations  to  he  Used. — Monday  quotations. 

Plot  both  the  high  and  the  low  rates  using  Mon- 
day quotations  only. 

57 


58   PKOBLEMS  IN  FOREIGN  EXCHANGE 

2 
Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  of  sight  bills  of  sterling  exchange 
in  New  York  for  the  most  recent  year  for  which  quota- 
tions are  available. 

3 

Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  checks 
on  Paris  for  1914.  The  daily  quotations  may  be  found 
in  The  Financial  Review  for  1919  under  the  heading, 
"  Daily  Rates  of  Exchange  on  Continental  Centers  for 
Five  Years." 

4 
Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  checks  on 
Paris  for  the  most  recent  year  for  which  quotations  are 
available. 

5 
Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  sight  bills 
on  Berlin  for  1914.  The  daily  quotations  may  be  found 
in  The  Financial  Review  for  1919  under  the  heading, 
"  Daily  Rates  of  Exchange  on  Continental  Centers  for 
Five  Years." 

6 
Construct  a  chart  similar  to  that  called  for  in  Problem 
1  for  the  actual  rates  in  New  York  of  bankers'  sight  bills 
on  Berlin  for  the  most  recent  year  for  which  quotations 
are  available. 


SOURCES  OF  SUPPLY  AND  DEMAND      59 

7 
Classify  and  briefly  describe  tbe  different  sources  from 
which  practically  all  the  demand  for  foreign  exchange 
originates. 

8 
Classify  and  briefly  describe  the  different  sources  from 
which  practically  all  the  supply  of  foreign  exchange  or- 
iginates. 

9 
How  would  you  expect  the  rates  of  sterling  exchange 
in  New  York  to  be  affected  by : 

(a)  Flotation    of   large   British    loan    in    the    United 
States  ? 

(b)  Failure  of  the  American  cotton  and  wheat  crops? 

(c)  Great  increase  in  output  of  American  gold  mines? 

(d)  Rapid    development    of    an    American    merchant 
marine  ? 

(e)  Increased  importations  of  coffee  from  Brazil? 
(/)   A  large  European  war? 

(g)  A  financial  panic  in  New  York? 

(h)   Increase  of  American  tourists  in  Europe? 

10 
Explain  what  is  meant  by  the  interdependence  of  ex- 
ports and  imports. 

11 
Prepare  a  tabulation  showing  total  exports,  total  im- 
ports, export  balance,  if  any,  import  balance,  if  any,  for 
the   United   States,   the    United   Kingdom,   France,    and 
Germany,   for  each  of  the  years   1909-1913   inclusive. 


«0  PROBLEMS  m  FOREIGN  EXCHAI^GE 

(Among  other  references  see  the  Statistical  Abstract  of 
Foreign  Countries.) 

(a)  Does  this  tabulation  bear  out  your  answer  to  Prob- 
lem 10  ?     If  not  explain  further. 

(h)  Do  the  figures  in  the  tabulation  show  the  same 
tendencies  for  each  individual  country?  How  do  you 
account  for  this? 

12 

The  term  "  balance  of  trade  "  refers  generally  to  the 
amount  by  which  the  physical  exports  of  a  given  nation 
exceed  its  physical  imports.  The  reason  for  the  so-called 
balance  of  trade  is  that  nations,  like  individuals,  are  con- 
stantly buying  from  each  other  services  as  well  as  physical 
objects.  In  other  words,  there  arises  what  are  known  as 
"  invisible  exports  "  and  "  invisible  imports." 

Prepare  a  tabulation  showing  precisely  what  the  United 
States  imports  and  what  it  exports  in  case  of: 

1.  Purchase  of  European  securities 

2.  Receipt    of    interest    and    dividends    on    European 

securities 

3.  Sale  of  American  securities  in  Europe 

4.  Payment   of   interest   and   dividends   on   American 

securities  held  in  Europe 

5.  Payment  of  ocean  freight  charges  to  English  steam- 

ship companies 

6.  Payment  of  marine  insurance  charges  to  English 

companies 

7.  Wealthy  Americans  marrying  titled  foreigners 

8.  Immigrants'  wages  remitted  to  the  "  old  country  " 


SOURCES  OF  SUPPLY  AND  DEMAND      61 

9.  Payment    of    commissions    to    English   brokers    hy 
American  customers  for  sale  of  securities  abroad 

10.  American  tourists  travelling  abroad 

11.  Foreign  tourists  travelling  in  the  United  State*. 

13 

(Exclusive  to  The  Joubnax  or  Commeece) 
NEW  YORK,  June  4,  1920.—  The  feature  of  the  foreign 
exchange  market  to-day  was  the  heavy  buying  of  German  ex- 
change on  London  account,  marks  cables  advancing  from 
2.22  to  2.43.  Sterling  was  heavy,  declining  11/^  cents  to 
3.893/4  for  demand. 

Explain  in  simple  language  the  significance  of  buying 
of  German  exchange  on  London  account. 

14 

(Exclusive  to  The  Joubnax  of  Commebce) 
NEW  YORK,  April  21,  1920.— Sterling  was  steady  at  a 
slight  decline  during  the  forenoon  to-day,  but  after  mid- 
day there  was  sudden  pressure  causing  demand  to  decline  to 
3.9214,  a  loss  of  2%  cents.  It  was  stated  by  some  of  the 
dealers  that  this  supply  represented  sales  for  Japanese 
account  and  was  connected  with  the  financial  crisis  now  pre- 
vailing in  Japan. 

Explain  fully  the  meaning  of  the  above  quotation. 

16 

In  discussing  the  effects  of  high  interest  rates,  Goschen, 
in  his  book  The  Theory  of  the  Foreign  Exchanges  states 
that: 


'62     PROBLEMS  IN  FOREIGIT  EXCHANGE 

"We  accordingly  may  conclude  that  what  is  technically  called 
a  stringent  money-market,  acts  materially  upon  the  exchanges, 
inducing  sellers  to  force  sales,  and  creating  a  reluctance  on 
the  part  of  purchasers  to  buy  unless  absolutely  compelled  to 
remit.  This  cause  will,  however,  not  come  forcibly  into  oper- 
ation, when  the  international  transactions  are  in  a  state  of 
equilibrium;  for  then  there  will  be  as  many  purchasers  on 
compulsion  as  there  are  sellers,  and  the  dearness  of  money 
may  only  operate  so  far  as  to  induce  purchasers  to  defer  their 
remittances  to  the  last  moment,  whereas  sellers  would  wish 
that  they  should  be  hastened.  Its  full  force  will  be  felt  at  a 
time  when  the  country  where  money  is  supposed  to  be  dear, 
or  where  panic  exists,  has  exported  more  than  it  has  imported, 
and  when  it  is  consequently  certain  that  gold  will  finally  have 
to  be  ordered,  while  no  individual  is  himself  willing  to  wait 
for  its  arrival. 

Develop  the  above  explanation  at  greater  length. 


II 

PAR  OF  EXCHANGE 

16 
Prepare  a  tabulation  showing: 

1.  iN'ames  of  ten  principal  countries  whose  currency 

is  on  a  gold  basis; 

2.  Names  of  monetary  unit; 

3.  Names  of  subdivisions  of  monetary  unit; 

4.  Number  of  grains  of  pure  gold  in  monetary  unit; 

5.  Dollar  equivalent  of  monetary  unit  or  par  of  ex- 

change with  the  United  States. 

17 
From  the  above  tabulation  explain  how  par  of  exchange 
is    determined    between    the    United    States    and    other 
countries  on  a  gold  basis. 

18 

Prepare  a  tabulation  showing  how  the  par  of  exchange 
is  determined  in  Loudon  on  New  York,  Paris,  Berlin, 
Pome,  Madrid,  and  Amsterdam-  Give  the  quotations 
in  English  money. 

19 

Prepare  a  tabulation  showing  how  the  par  of  exchange 
is  determined  in  Paris  on  New  York,  London,  Berlin, 

63 


'64     PROBLEMS  IN  FOREIGN  EXCHANGE 

Rome,  Madrid,  and  Amsterdam.     Give  the  quotations  ia 
French  money. 

20 
Prepare  a  tabulation  showing  how  the  par  of  exchange 
is  determined  in  Berlin  on  New  York,  London,  Paris, 
Rome,  Madrid,  and  Amsterdam.     Give  the  quotations  in 
German  money. 

21 
Prepare  a  tabulation  showing: 

1.  Names  of  principal  countries  whose  currency  is  on 

a  silver  basis; 

2.  Names  of  monetary  unit ; 

3.  Names  of  subdivisions  of  monetary  units; 

4.  Number  of  grains  of  pure  silver  in  the  monetary 

unit; 

5.  Most  recent  available  quotation  on  the  price  of  sil- 

ver bullion  per  ounce  in  the  New  York  market; 

6.  Dollar  equivalent  of  monetary  unit  or  momentary  par 

of  exchange  with  the  United  States  at  the  above 
price  of  silver  bullion. 

22 
From  the  above  tabulation  explain  how  the  momentary 
par  of  exchange  is  determined  between  the  United  States 
and  countries  on  a  silver  basis.  By  the  momentary  par  of 
exchange  is  here  meant  the  relative  par  of  exchange,  that 
is,  the  one  that  is  based  upon  the  market  value  of  the  bul- 
lion contents  of  the  monetary  units  of  the  countries  in 
question  at  a  particular  instant. 


PAR  OF  EXCHANGE  66 

23 
Explain  how  the  momentary  par  of  exchange  is  deter- 
mined between  England  and  countries  on  a  silver  basis. 

24 

Why  is  it  that  the  par  of  exchange  between  the  United 
States  and  England  did  not  change  during  the  War? 
What  conditions  would  affect  the  par  of  exchange  be- 
tween these  two  countries  ?  Would  these  same  conditions 
be  equally  applicable  to  other  countries? 

25 
What  is  the  significance  of  the  terms  "  upper  gold  point  " 
and  "  lower  gold  point "  ? 

26 

Bastable  in  his  Theory  of  International  Trade  states: 
"  The  upper  limit  of  exchange  fluctuations  is  par,  plus 
the  cost  of  transmitting  specie,  the  lower  limit  par,  minus 
the  cost  of  transmitting  specie."  In  other  words,  twice 
the  cost  of  transmitting  specie  is  the  whole  spread  within 
which  exchange  fluctuations  can  normally  take  place. 
Why  was  this  theory  not  borne  out  during  and  following 
the  World  War? 

27 

Point  out  why  the  terms  "  favorable  exchange "  and 
"  unfavorable  exchange  "  are  misleading. 

28 
The  gold  peso  of  Argentina  contains  22.4017  grains  of 
pure  gold.     Argentina  introduced  the  gold  standard  in 


66      PROBLEMS  IN  FOREIGN  EXCHANGE 

1881,  but  maintained  it  only  five  years,  when  it  was  re- 
placed by  paper  currency.  In  1889  the  Government  fixed 
the  premium  on  gold  in  terms  of  the  depreciated  paper 
peso  at  127.2727  per  cent. 

In  other  words,  the  value  of  the  paper  peso  in  terms  of 
the  gold  peso  was  fixed  at  44  centavos. 

From  the  above  facts  determine  the  par  of  exchange  be- 
tween the  United  States  and  Argentina  in  terms  of:  (a) 
the  gold  peso;  (&)  the  paper  peso. 

29 
Determine  (a)  and  (&)  as  above  (28)  for  England  and 
Argentina. 

30 
By  use  of  the  Chain  Rtile  determine: 
How  many  francs  =  £1 

if  the  weight  of  £1  =  7.98805    grammes    Eng- 

lish standard  gold 
if    12    grammes    English 

standard  gold  =11   grammes  fine  gold 

if  900  grammes  fine  gold    ^=  3,100  francs? 

31 

By  use  of  the  Chain  Rule  determine: 
How  many  marks  =  £1 

if  the  weight  of  £1  =  7.98805    grammes    Eng- 

lish standard  gold 

if    12    grammes    English 

standard  gold  =11  grammes  fine  gold 

if  500  grammes  fine  gold  =  1,395  marks  (69%  X  20)  ? 


PAR  OF  EXCHANGE  67 

32 

By  use  of  the  Chain  Rule  determine: 
How  many  dollars  =  £1 

if  the  weight  of  £1  =  7.98805    grammes    Eng- 

lish standard  gold 
if    12    grammes    English 

standard  gold  =11  grammes  fine  gold 

if  232.2  grains  fine  gold  =  10  dollars? 

33 

Prepare  a  table  showing  the  approximate  equivalent  of 
the  rupee  in  the  currencies  of:  (1)  United  States;  (2) 
Great  Britain;  (3)  France;  (4)  Italy;  (5)  Belgium.  Use 
the  latest  available  quotations  for  silver. 

34 

The  Haikwan  tael,  a  Chinese  monetary  unit,  is  one  of 
the  four  principal  taels  of  that  country,  although  it  has 
been  stated  by  foreign  exchange  experts  that  there  are  no 
less  than  170  well-recognized  and  different  currencies  in 
China.  Theoretically  the  Haikwan  tael  contains  an  ounce 
of  pure  silver  and  is  taken  to  be  the  equivalent  of  1.50 
Mexican  dollars.  The  actual  amount  of  pure  silver  in  the 
Haikwan  tael,  however,  is  uncertain,  but  the  basis  of  ex- 
change calculations  is  583.3  grains.  In  financial  reckon- 
ings 100  Haikwan  taels  are  figured  as  being  equal  to 
111.40  taels  (Shanghai  currency). 

(a)  Prepare  a  table  showing  the  approximate  equivalent 
of  the  Haikwan  tael  in  the  currencies  of  the  United  States, 


68      PROBLEMS  IN  FOREIGN  EXCHANGE 

Great  Britain,  and  India.     Use  the  latest  available  quota- 
tions for  silver. 

(6)  Prepare  a  similar  table  of  equivalents   for  the 
Shanghai  taeL 


Ill 

THEORY  OF  FOEEIGN  EXCHANGE  RATES 

35 

What  are  the  main  factors  which  determine  the  difference 
in  the  rate  of  exchange  between  cable  transfers  and  de- 
mand drafts? 

36 

Why  is  it  that  the  spread  between  cable  transfers  and 
demand  drafts  is  not  always  determined  by  the  mail 
time  between  the  two  points  involved  and  the  current 
interest  rate? 

37 
In  June  1919  actual  British  gold  sovereigns  were  sold 
at  as  high  a  rate  as  $5.15  in  New  York  and  Boston.  In 
November  1919  they  were  still  quoted  at  a  premium  above 
their  intrinsic  value  of  $4.8665.  How  do  you  account 
for  this  fact? 

38 

For  many  years  certain  countries  like  Argentina  and 
Brazil  have  had  monetary  systems  based  on  a  depreciated 
paper  currency. 

(a)  Does  this  depreciation  of  currency  of  each  of  these 

countries  affect  their  foreign  trade? 

(6)  Does  it  affect  their  foreign  exchange? 

69 


TO      PROBLEMS  IN  FOREIGN"  EXCHANGE 

39 

Why  do  bills  drawn  at  over  60  days'  sight  bear  a  higher 
rate  of  discount,  as  a  rule,  than  the  market  rate  for 
sixties  ? 

40 

Assume  that  the  rate  at  New  York  for  a  demand  bill, 
or  check,  on  London  is  4.1250.  Determine  the  rate  for 
a  60-days'  sight  bill,  on  a  London  bank,  or  prime  merchant, 
documents  against  acceptance,  under  the  following  condi- 
tions : 

1.  London  discount  rate  on  60-days'  sight  bills,  4  per 

cent. 

2.  English  stamp  charges,  1/20  per  cent. 

3.  Commission  of  London  banker,  1/40  per  cent. 

4.  Margin  of  profit  for  American  bank   I/4  cent  per 

pound. 

5.  Basis  of  computation  £100  =  $412.50. 

41 

If  the  London  discount  rate  in  the  above  problem  should 
increase  to  4^4  pcr  cent  what  would  be  the  effect  on  the 
rate  for:   (a)  demand  bills?  (&)   60-days'  sight  bills? 

42 
The  following  quotation  has  been  taken  from  the  April, 
1919,  monthly  letter  of  the  Mechanics  and  Metals  National 
Bank  of  New  York  City  in  reference  to  the  discontinuance 
of  the  policy  of  stabilizing  sterling  exchange,  which  also 
happened  almost  simultaneously  in  the  case  of  franc  and 
lire  exchange: 


FOREIGN  EXCHANGE  RATES  71 

No  single  financial  event  has  created  more  interest  recently 
than  tlie  removal  of  the  "  peg "  that  supported  the  rate  of 
sterling  exchange  in  the  New  York  market.  That  rate  had 
been  fixed  by  the  British  Government  at  $4.76  7-16  for  the 
pound  from  January,  1916,  until  the  closing  fortnight  of 
March  1919,  by  the  simple  means  of  authorizing  J.  P.  Morgan 
&  Co.  to  buy  bills  that  might  be  oifered  in  New  York 
at  tliat  rate.  The  British  Government  suspended  this  plan 
last  month,  and  a  sharp  decline  in  sterling  followed. 

It  is  explained  that  by  permitting  British  bills  to  decline 
to  a  point  where  higher  remittances  are  made  extremely  costly 
to  the  English  business  man,  purchases  in  the  United  States 
for  imports  into  Great  Britain  will  be  curtailed. 

Whether  this  is  the  primary  reason  for  the  action  taken, 
or  whether  some  other  motive  governed,  the  official 
"pegging"  policy  would  under  any  circumstances  have  had 
to  be  abandoned  sooner  or  later,  yet  the  incident  draws 
attention  very  directly  to  the  immediate  prospect  of  our 
export  trade. 


(a)  By  what  means  were  J.  P.  Morgan  &  Co.  provided 
with  funds  by  the  British  Government  to  buy  sterling  ex- 
change under  the  conditions  mentioned  ? 

(&)  Why  was  the  plan  for  "pegging"  the  exchange 
bound  to  prove  inadequate  as  a  permanent  scheme  for 
stabilizing  rates? 

43 

Briefly  describe  and  arrange  in  the  order  of  their  price 
quotations  during  the  past  week  the  following  general 
classes  of  sterling  bills : 


72      PROBLEMS  IN  FOREIGN"  EXCHANGE 

1.  Bankeri*  long  billt 

2.  Bankers'  short  bills 

3.  Cable  transfers 

4.  Commercial  clean  long  bills 

5.  Commercial  clean  short  bills 

6.  Documentary  long  bills 

7.  Documentary  short  bills. 

44 

While  the  price  of  wheat  in  such  primary  markets  as 
Chicago,  Kansas  City,  or  Duluth  is  usually  lower  than  at 
seaboard,  the  spread  must  ordinarily  be  large  enough  to 
yield  a  profit  after  allowing  for  transportation,  insurance, 
commissions,  and  other  expenses  before  there  is  an  in- 
ducement for  a  trader  to  buy  in  a  western  and  sell  in  an 
eastern  city. 

Are  there  any  similar  conditions  affecting  the  foreign 
exchange  markets?  If  so  explain  precisely  what  the  fac- 
tors are. 

45 

Assume  that  the  rate  at  'New  York  for  bankers'  checks 
on  Paris  is  13.16.  Determine  the  rate  for  a  90-days' 
sight  bill,  on  a  French  bank,  or  prime  merchant,  documents 
against  acceptance,  under  the  following  conditions: 

1.  Paris  discount  rate  on  90-days'  sight  bills,  5  per 

cent. 

2.  French  bill  stamp  duty,  1/20  per  cent. 

3.  Margin  of  profit  for  American  bank,  1/20  per  cent. 

4.  Commission  charged  to  account  of  American  bank 

by  Paris  banker,  1/40  per  cent. 


FOREIGN  EXCHANGE  RATES  73 

46 
If  the  Paris  discount  rate  in  the  above  problem  should 
be  reduced  to  4^/0  per  cent  what  would  be  the  effect  on 
the  rate  for:  (a)  bankers'  checks  on  Paris?  (6)  90-days' 
sight  bills  on  Paris  ? 

47 

In  Bombay,  the  great  silver  market  of  India,  the  con- 
tracts for  the  purchase  and  sale  of  silver  are  not  infre- 
quently stated  in  sterling,  but  it  is  considered  preferable  to 
deal  in  bars  of  standard  weight.  The  standard  weight  of 
a  bar  of  silver  in  India  is  2,800  tolas  (1,050  ounces),  al- 
though British,  Australian,  or  American  bars  find  a  good 
market,  if  they  weigh  about  1,000  ounces  and  are  99.6 
to  99.9  per  cent  fine. 

When  silver  has  been  purchased  in  London  to  be  shipped 
to  Bombay,  it  is  necessary  to  make  certain  calculations  in 
order  to  determine  the  Indian  price  in  rupees  at  which  the 
silver  is  to  be  sold.  Quotations  are  usually  made  on  the 
basis  of  rupees  per  100  tolas  99.8  per  cent  fine.  To  get 
at  the  equivalent  of  the  London  price  operators  begin 
their  calculations  with  a  constant  derived  from  a  series 
of  simple  equations  solved  by  Chain  Rule.  Mr.  Nilkanth 
Gopinathnoejee  in  a  book  of  Indian  Silver  Tables  ^  gives 
the  following  formulae  to  show  the  constants  used  by 
most  of  the  exchange  banks,  bullion  brokers,  and  silver 
dealers  in  making  their  calculations: 

1  See  Wm.  F.  Sp&Iding,  Eastern  Exchange  Currency  and  Finance. 


74      PROBLEMS  IN  FOREIGN  EXCHANGE 

1.  Neglecting  charges  and  interest: 

Rupees  ?  =  100  tolas  at  998. 

'     If  Tolas  1,000  at  998  =  tolas  fine 

Tolas  8  =  3  oz.  fine 

Oz.  222  fine  =  240  oz.  standard. 

Oz.  standard  1  =  London  silver  price  (pence) 
T.  T.  exchanffe  on  London  =  Runee  1 

100X998X3X240 

=  40.46  constant. 


1,000  X  8  X  222 


2.  Including  charges  and  brokerages  but  neglecting  interest 
give  a  constant  40.8. 

The  unknowns  in  these  equations  are  the  rate  for  the 
telegraphic  transfers  on  London  and  the  price  of  silver  in 
the  London  market,  both  of  which  may  vary  from  day  to 
day.  When  the  constant  has  been  found  it  is  a  simple 
matter  to  determine  the  Indian  equivalent  of  a  London 
price  by  making  the  calculation  in  this  form : 

London  silver  price 

Constant  (Z)      z^-^ r T ] — ' 

T.  T.  exchange  on  London 

Therefore,  when  the  price  of  silver  in  London  is  30d. 
per  standard  ounce  and  the  rate  for  telegraphic  transfers 
on  London  is  Is.  4d.,  the  Indian  price  (including  charges 
and  brokerage)  would  be  Rs  76.5  per  100  tolas  of  silver 
delivered  in  Bombay.     This  is  determined  as  follows: 

40.8  X  30 
is.  16d.        =''■' 

Excluding  charges,  the  price  would  be  Rs.   75.862. 
Apply  the  above  calculations  to  the  most  recent  avail- 
able exchange  quotations  between  London  and  Bombay. 


rOREIGN  EXCHANGE  RATES  75 

48 
Construct  a  chart  to  show  the  relation  between  the  price 
of  silver  on  the  London  market  and  the  Chinese  exchange 
quotations  for  the  last  two  years.  By  the  use  of  three 
curves  indicate  the  weekly  figures  for  the  price  of  silver 
per  ounce  in  London,  the  dollar  rate  in  Hongkong  for  tele- 
graphic transfers  on  London,  and  the  tael  rate  in  Shanghai 
for  telegraphic  transfers  on  London. 

49 

In  February,  1920,  the  Government  of  India,  acting 
upon  a  recommendation  of  the  committee  appointed  by 
the  Secretary  of  State  for  India  to  inquire  into  the  ex- 
change and  currency  of  that  country,  put  into  effect  a 
plan  to  create  a  stable  relationship  between  the  rupee  and 
gold,  by  fi:xing  the  exchange  value  of  the  former  at  Rs  10 
to  one  sovereign.  This  step  was  considered  necessary  be- 
cause it  was  recognized  that  while  the  rupee  in  terms  of 
gold  had  appreciated,  the  pound  currency  had  depreciated 
and  that,  therefore,  the  previous  legal  tender  rate  in  Lon- 
don of  Rs  15  to  one  sovereign  was  unsatisfactory.  Had 
it  been  decided  to  fix  the  ratio  with  sterling  instead  of 
with  gold,  the  result  would  have  been  that  the  rupee-ster- 
ling exchange  would  fluctuate  in  the  same  manner  as  the 
dollar-sterling  exchange.  As  a  result  of  this  new  plan, 
the  acquisition  rate  for  gold  tendered  by  private  importers 
to  the  Government  of  India  under  the  Gold  Import  Act  is 
now  definitely  fixed  at  11.3001G  grains  of  fine  gold. 

In  establishing  the  ratio  of  10  rupees  to  one  sovereign, 
it  has  appeared  to  some  people  that  the  rate  has  not  been 


76      PKOBLEMS  IN  FOREIGN  EXCHANGE 

filled  sufficiently  high  to  give  assurance,  so  far  as  is  prac- 
ticable, that  the  rupee,  while  retaining  its  present  weight 
and  fineness,  will  remain  a  token  coin ;  or,  in  other  words, 
that  the  bullion  value  of  the  silver  it  contains  will  not 
exceed  its  exchange  value.  However,  if  the  price  of 
silver  rises  for  more  than  a  brief  period  so  that  the 
bullion  value  of  the  rupee  is  more  than  2s  (gold),  the 
Indian  authorities  are  recommended  to  meet  the  situa- 
tion by  all  other  available  means,  rather  than  by  impairing 
the  convertibility  of  the  note  issue.  The  measures  pro- 
posed are,  reduction  of  the  sale  of  Council  bills,  absten- 
tion from  purchases  of  silver,  and  the  use  of  gold  to  meet 
demands  for  metallic  currency. 

(a)  By  using  the  latest  available  quotation  for  the  Lon- 
don market,  determine  the  amount  that  silver  would  have 
to  increase  in  price  per  ounce  in  English  money  (sterling) 
before  the  bullion  value  of  the  rupee  would  be  greater  than 
the  exchange  ratio  of  Rs.  10  to  one  sovereign.  What  is 
the  corresponding  increase  in  price  in  cents? 

(h)  Explain  the  plan  by  which  the  Government  of  India 
is  able,  through  the  sale  of  Council  bills,  to  establish  a 
stable  relationship  between  the  rupee  and  gold. 

50 

"When  we  remember  that  the  mint  value  of  gold  before  the 
war  was  1,395  German  marks  the  fine  kilo,  the  statement  of 
the  Neue  Zurcher  Zeitung  that  gold  has  changed  hands  in 
Germany  at  the  rate  of  67,000  marks  the  fine  kilo  is  a  power- 
ful illustration  of  the  financial  collapse  of  that  country. 
{Economist  (London),  Feb.  28,  1920.) 

What  is  the  premium  on  gold  at  the  above  rate? 


FOREIGN  EXCHANGE  RATES  17 

51 

Silver:  The  movements  of  the  price  during  the  week 
have  been  remarkable.  On  the  5th  inst.  a  fall  —  undoubtedly 
a  record  movement  on  any  one  day  —  of  BYgd  took  place  in 
the  cash  quotation,  and  of  5%d  in  that  for  forward  delivery. 
To-day  a  further  heavy  fall  took  place  of  Si/gd  and  4%d 
respectively.  The  chief  reason  for  such  great  changes  has 
been  the  improvement  in  the  exchange  with  the  United 
States  of  America,  following  the  announcement  that  the 
Anglo-French  loan  of  £100,000,000  due  to  that  country  is 
to  be  paid  off.  The  £50,000,000  for  which  this  country  is 
responsible  represents  but  a  small  proportion  of  our  total 
indebtedness,  and  its  repayment  naturally  costs  in  our  cur- 
rency far  more  than  the  nominal  sum  indicated.  The  less- 
ening premium  on  the  United  States  dollar  was  reflected  also 
in  the  Shanghai  exchange,  and  buyers  on  account  of  China 
have  been  disposed  to  hold  off  in  the  hope  of  obtaining 
cheaper  silver.     (Economist  (London),  March  13,  1920.) 

Discuss  the  above  quotation  critically  and  explain  the 
meaning  of  the  different  technical  terms  used. 

52 

"We  have  heard  from  Bombay  by  mail  under  date  of  March 
12th  that  the  price  of  gold  in  that  city  —  owing  to  Gov- 
ernment sales  —  has  dipped  below  Rs.  23  14.4a,  the  equivalent 
per  total  of  gold  as  based  upon  15  rupees  per  sovereign  (full 
weight).  Our  correspondents  state  that  as  soon  as  dealers 
were  able  to  secure  gold  purchased  in  the  last  Government 
sale,  they  commenced  to  sell  it  freely,  and  the  price  again 
declined  to  Rs.  21  6a.  The  quotation  for  the  March  settle- 
ment was  1  rupee  below  this  ready  rate.  This  movement  is 
extremely  interesting  in  that  it  shows  that  Government  sales 


78      PROBLEMS  m  FOREIG:Nr  EXCHANGE 

have  achieved  their  purpose,  and  that  a  condition  of  affairs 
has  now  been  reached  which  suggests  that,  were  the  external 
and  internal  ratios  of  the  rupee  to  the  sovereign  made  iden- 
tical, the  bazaar  price  of  gold  would  probably  adjust  itself 
in  accordance.     (Economist  (London),  April  10,  1920.) 

Explain  the  different  parts  of  the  above  quotation  at 
greater  length. 

53 

Silver:  The  powerful  influences  at  work  have  been  dem- 
onstrated during  the  week  by  very  wide  fluctuations  in  the 
price.  The  prices  on  the  day  following  our  last  letter,  that 
is  to  say  February  33th,  were  notable  for  tlie  two  fresh  rec- 
ords involved,  namely,  the  forward  quotation  fell  no  less 
than  5%d  from  that  of  the  day  before,  and  the  discount  for 
forward  delivery  reached  5d.  The  actual  cause  of  these  re- 
markable quotations  was  the  temporary  entry  of  China  into 
the  market  as  seller  at  a  time  when  the  Continent  was  also 
freely  operating  in  the  same  direction.  The  mark,  however, 
was  overshot,  and  a  steady  rally  ensued,  encouraged  by  an 
enquiry  from  China  amongst  other  buyers.  The  substratum 
of  strength  in  the  silver  position  is  evidenced  by  this  strong 
reaction,  notwithstanding  adverse  influences  connected  with 
the  approaching  Chinese  new  year,  the  heavy  sales  of  melted 
coin  from  the  Continent,  and  the  free  realization  of  plate,  &c. 
So  considerable  is  the  latter  that  the  trade  is  more  than  sup- 
plied from  this  source.  (Economist  (London),  February  21, 
1920.) 

Discuss  the  above  quotation  critically  and  point  out 
the  significance  of  the  various  technical  terms  used  by  the 
writer. 


FOEEIGN  EXCHANGE  RATES  79 

54 

A  telegram  was  despatched  from  Delhi  on  March  13th  to 
the  effect  that  a  Bill  is  being  introduced  with  regard  to  the 
nature  of  the  securities  in  which  investments  of  the  currency 
reserve  are  permitted.  At  present  the  fiduciary  reserve  — 
which  is  allowed  up  to  10,000  lacs  —  consists  of  8,250  lacs 
in  British  Government  and  the  balance  in  Indian  Government 
securities.  The  object  of  the  new  proposals  probably  is  that, 
if  desired,  British  Government  securities  can  be  sold  in  Lon- 
don and  the  equivalent  invested  in  Indian  Government  secu- 
rities, or  vice  versa.     {Economist  (London),  March  27,  1920.) 

Explain  in  less  technical  language  the  meaning  of  the 
above  quotation. 

65 

Silver:  The  tendency  has  been  downward.  The  cash 
price  has  kept  up  fairly  well,  owing  to  a  demand  for  prompt 
delivery  on  account  of  the  Indian  Bazaar  and  elsewhere,  but 
news  from  China  has  not  been  promising,  and  a  considerable 
amount  of  silver,  representing  contracts  shortly  falling  due, 
has  been  placed  upon  the  market,  and  owing  to  the  dull  out- 
look, has  not  been  replaced  by  fresh  forward  contracts.  The 
Continent  continues  to  sell  with  some  degree  of  freedom,  al- 
though the  large  discount  upon  silver  for  forward  delivery 
lias  not  encouraged  the  heavy  sales  which  obtained  in  pre- 
ceding weeks.  The  congestion  of  the  refineries,  which  still 
continues,  may  keep  the  forward  rate  at  a  discount,  though, 
unless  China  is  prepared  to  sell  for  forward  delivery,  the 
present  difference  between  the  two  quotations  seems  unduly 
large.     (Economist  (London),  April  17,  1920.) 

Explain  in  less  technical  language  the  meaning  of  the 
above  statements  in  reference  to  silver. 


80      PROBLEMS  IN  FOREIGN  EXCHANGE 

56 

Since  Monday  gold  has  been  obtainable  daily  in  this  (Lon- 
don) market  at  a  premium  over  the  pre-war  price  of  approxi- 
mately 16  per  cent.,  which  is  equivalent  to  the  premium  now 
ruling  on  American  exchange.  (Economist  (London),  Sep- 
tember 20,   1919.) 

Exactly  what  is  meant  by  the  "  pre-war  price  "  and  how 
much  was  it  ? 

57 
Prepare  a  chart  which  will  indicate  whether  the  trend 
of  the  premium  on  gold  bullion  in  the  London  market  has 
followed  the  same  general  course  as  the  discount  on  sterling 
exchange  in  New  York. 


IV 

CONVEESIONS  IN  FOEEIGN  EXCHANGE 

58 
Find  the  sum  of  C30  pounds,  10  shillings,  6  pence;  132 
pounds,  15  shillings,  9  pence;  and  354  pounds,  7  shillings, 
44  pence. 

69 

Find  the  product  of  9  times  361  pounds,  18  shillings, 
11  pence. 

60 

Subtract  238  pounds,  16  shillings,  10  pence  from  696 
pounds,  4  shillings,  5  pence. 

61 

Divide  135  pounds,  8  shillings,  2  pence  into  9  equal 
parts. 

62 
Reduce  763  pounds,  14  shillings,  2  pence  to  pounds 
and  decimal  of  a  pound. 

63 

Find  the  equivalent  in  United  States  money  of  625 

pounds,  5  shillings,  3  pence  at  the  rate  of  exchange  $4.87 

per  pound. 

81 


82      PROBLEMS  IN  FOREIGN  EXCHANGE 

64 
Find  the  equivalent  in  United  States  money  of  625 
pounds,  5   shillings,  3  pence  at  the  present  market  rate 
for  demand  bills. 

65 
Find  the  equivalent  in  English  money  of  $3,576.35 
(United  States  money)  at  the  rate  of  exchange  $4.87  per 
pound. 

66 
Find  the  equivalent   in  English  money  of   $3,576.35 
(United  States  money)    at  the  present  market  rate  for 
demand  bills. 

67 
Find  the  interest  at  the  rate  of  5   per  cent  on   650 
pounds,  10  shillings,  7  pence  for  one  year. 

68 
Find  the  interest  in  English  money  on  150  pounds,  12 
shillings,  6  pence  for  63  days  at  the  rate  of  5  per  cent, 
allowing  365  days  to  the  year. 

69 
Find  the  cost  of  10,000  francs  at  the  present  market 
rate  for:  (a)  sight  bills  on  Paris ;  (&)  30-day  bills;  (c)  60- 
day  bills. 

70 
Find  the  amount  in  francs  and  centimes  that  can  be 
purchased  for  $13,684.80  at  the  present  market  rate  for: 
(a)  sight  bills  on  Paris ;  (&)  30-day  bills;  (c)  60-day  bills. 


CONVERSIONS  IN  FOREIGN  EXCHANGE      83 

71 
Find  cost  of  6,275.50  francs  in  United  States  money 
at  rate  of  exchange  francs  5.161/4  minus  1/16  of  1  per 
cent  (expressed,  francs  5.I6I/4  —  1/16). 

72 
Find  cost  of  6,275.50  francs  in  United  States  money 
at  rate  of  exchange  francs  5.I614  plus  1/16  of  1  per 
cent  (expressed,  francs  5.I614  +  1/16). 

73 

Find  the  amount  of  francs  and  centimes  that  can  be 
purchased  for  $6,275.50  at  rate  of  exchange,  francs  5.16^4 
minus  1/16  per  cent. 

74 
Find  the  amount  of  francs  and  centimes  that  can  be 
purchased  for  $6,275.50  at  rate  of  exchange,  francs  5.161/4 
plus  1/16. 

75 
Find  the  price  of  a  single  franc  at  the  current  rate 
of  exchange. 

76 
Find  the  amount  in  francs  and  centimes  that  can  be  pur- 
chased for  $12,685.30   at  the  rate  per  single  franc  in 
Problem  75. 

77 
Find  the  cost  of  10,760.60  marks  at  the  present  market 
rate  for:  (a)  sight  bills  on  Berlin;  (&)  30-day  bills;  (c) 
60-day  bills. 


84      PROBLEMS  IN  F0REIG:N'  EXCHANGE 

78 
Find  the  amount  in  marks  and  pfennigs  that  can  be 
purchased  for  $3,675.76  at  rate  of  exchange  95  1/16  per 
4  marks. 

79 
Find  the  amount  in  marks  and  pfennigs  that  can  be 
purchased  for  $3,675.76  at  the  present  market  rate  for: 
(a.)  sight  bills  on  Berlin;   (b)  30-day  bills;   (c)  60-day 
biUs. 


FINANCING  IMPORTS  AND  EXPORTS 

80 

Prepare  a  tabulation  for  the  United  States,  England, 
France,  and  Germany  showing; 

1.  Whether  bills  of  exchange   are  discounted   on   the 

basis  of  360  or  365  days  to  the  year. 

2.  Whether  days  of  grace  are  allowed  and  on  what 

kind  of  bills. 

3.  IIow  stamp  charges  are  figured. 

4.  Usual  commission  charges. 

81 
A  Boston  bank  receives  for  collection  a  60-day s'  sight 
bill  drawn  by  a  Buenos  Aires  exporter  on  a  local  leather 
merchant  for  $4,000.  The  instructions  are  that  the  pro- 
ceeds shall  be  invested  immediately  in  a  90-days'  sight 
bill  on  London,  and  forwarded  to  a  Ix)ndon  bank  for 
the  credit  of  the  Buenos  Aires  bank.  With  the  Boston 
discount  rate  for  60-day  bills  at  31/2  per  cent,  the  Boston 
bank's  charge  for  collection  1/4  P^r  cent  of  the  face  of 
bill,  the  rate  on  the  90-days'  sight  bill  on  London  at  4.72, 
the  London  discount  rate  for  90-day  bills  at  4  per  cent, 
and  English  stamp  charges  1/20  per  cent  of  face  of  bill, 
what  amount  in  pounds  will  be  placed  to  the  credit  of  the 

Buenos  Aires  bank  in  London  ? 

85 


86   PROBLEMS  IN  FOREIGN  EXCHANGE 

Would  it  have  been  more  advantageous  to  invest  the 
proceeds  in  a  demand  bill  at  4.76  ? 

82 
Describe  all  the  docimients  that  would  be  involved  in 
Problem  81  and  trace  their  movement  from  beginning  to 
end. 

83 
Langdon  and  Son,  Ltd.,  of  London,  arrange  with  Packer 
and  Company  of  Chicago,  for  a  shipment  of  beef  amount- 
ing to  £8,500.     The  following  details  are  furnished  to 
Packer  and  Company : 

1.  Quantity  of   shipment,   purchase   price,    and   other 

specifications  regarding  the  quality  and  character 
of  the  goods  to  be  shipped. 

2.  Route  of  shipment  and  special  instructions  if  any. 

3.  Reimbursement,    that    is    60-days'    sight    draft    on 

buyers. 

4.  Expiration  of  contract. 

5.  Insurance  to  be  covered  on  shipments. 

(a)  Describe  all  documents  that  would  be  involved  and 
trace  their  movement  from  beginning  to  end. 

(&)  Determine  the  price  paid  by  the  negotiating  bank- 
ers in  Chicago  for  the  60-days'  sight  bill  on  Langdon  and 
Son,  Ltd.,  with  these  facts  known: 

1.  Demand  rate  for  bankers'  checks  on  London  $4.76 

2.  London  rebate  rate  for  60-day  bills  4  per  cent 

3.  English  stamp  charges  1/20  per  cent 

4.  Margin  of  profit  for  Chicago  bankers  14  <^6nt  per 

pound 


FINANCING  IMPORTS  AND  EXPORTS     87 

5.  Commission  charged  to  account  of  Chicago  bankers 

by  London  bank  1/40  per  cent. 

84 

The  Modern  Shoe  Machinery  Company  of  Boston  have 
sold  some  shoe  machinery  to  a  firm  in  Stockholm.  The 
latter's  bank  has  arranged  with  its  London  correspondent 
for  the  acceptance  of  90-days'  sight  bills  to  the  amount  of 
£3,500,  properly  drawn  and  with  the  necessary  docu- 
ments attached. 

(a)  Explain  the  steps  that  might  ordinarily  be  taken 
by  the  Swedish  firm  in  arranging  for  the  financing  of 
this  transaction  and  describe  the  various  documents  that 
would  be  involved. 

(h)  Compute  the  proceeds  which  the  Boston  banker  will 
pay  the  Modern  Shoe  Machinery  Company  with  these 
conditions  given : 

1.  Demand  rate  for  bankers'  checks  on  London  $4.55 

2.  London  discount  rate  for   90-days'   sight  bills  4^ 

per  cent 

3.  English  stamp  charges  1/20  per  cent 

4.  Margin   of  profit   for   Boston   banker   1/4   cent  per 

pound 

6.  London  banker's  commission  1/40  per  cent. 

85 
A  Boston  bank  opens  an  account  with  a  London  corre- 
spondent and  purchases  exchange  for  immediate  remit- 
tance as  follows : 


88      PROBLEMS  IN  FOREIGN  EXCHANGE 

1.  Demand  bill  drawn  by  a  shoe  machinery  company 

for  £5,000  at  4.78. 

2.  eO-days'   sight  bill  for  £3,500   drawn  by  a  cotton 

manufacturer  at  4.745.     London  discount  rate  is 
41/^  per  cent. 

3.  Demand  bill  for  £2,400  drawn  by  a  woolen  manu- 

facturer at  4.778. 

4.  90-days'  sight  bill  for  £3,800  drawn  by  a  shoe  manu- 

facturer at  4.725.     London  discount  rate  is  4^/4 
per  cent. 
Drafts  sold  by  the  Boston  bank  are  as  follows: 

1.  Demand  bill  for  £3,000  at  4.788. 

2.  60-days'  sight  bill  for  £2,800  at  4.76. 

3.  Demand  bill  for  £4,500  at  4.80. 

4.  Remainder  in  60-days'  sight  bill  at  4.764. 

How  much  profit,  if  any,  has  the  Boston  bank  made  as 
a  result  of  these  transactions  before  any  allowance  has 
been  made  for  interest?  Allow  an  acceptance  commis- 
sion of  Yg  per  cent  on  all  sight  bills  drawn  by  the  Boston 
bank  on  its  London  correspondent.  Other  bills  require 
no  commission  of  this  kind.  The  regular  English  stamp 
charges  are  to  be  taken  into  account. 

86 

The  S.  A.  Billings  Company  of  Boston  have  arranged 
with  a  merchant  in  Singapore  for  the  purchase  of  40  boxes 
of  tea  weighing  124  lb.  each.  The  price  agreed  upon  is 
16  pence  per  pound  f.  o.  b. .Singapore.  The  terms  are 
that  the  Singapore  merchant  is  to  draw  a  90-days'  sight 
bill  on  London  for  the  invoice  value  of  the  shipment  up  to 


riNANCING  IMPORTS  AND  EXPORTS     89 

425  pounds  sterling.  At  the  latest  available  foreign  ex- 
change quotations,  how  much  will  the  shipment  cost  the 
S.  A.  Billings  Company,  allowing  a  Boston  banker's  com- 
mission of  1/2  per  cent?  Ten  days  before  the  bill  be- 
comes due  in  London  the  local  buyer  will  purchase  for  re- 
mittance demand  exchange  on  London  at  a  local  bank  and 
thus  settle  the  transaction.  Additional  charges  to  be  paid 
by  the  S.  A.  Billings  Company,  are: 

1.  Freight  at  %  per  cent  of  price  f.  o.  b.  Singapore. 

2.  Marine  insurance  at  1/4  P^^  cent  on  cost  of  tea  f.  o.  b. 

Singapore,  plus  freight  and  10  per  cent  profit. 

3.  Cost  of  negotiating  a  London  draft  in  Singapore  at 

3  per  cent  of  draft. 

The  Singapore  merchant  prepays  the  above  charges  and 
reimburses  himself  by  including  them  in  his  draft  on 
London. 

87 

The  Lawrence  Woolen  Company,  contemplating  a  pur- 
chase of  a  cargo  of  wool  from  Melbourne,  observed  that 
90-days'  sight  bills  on  London  were  selling  at  4.74,  and 
accordingly  bought  and  remitted  to  London  for  their  credit 
such  exchange  to  the  amount  of  £100,000.  Some  two 
weeks  later  they  arranged  for  a  shipment  of  wool  from 
Melbourne  with  the  agreement  that  the  Australian  mer- 
chant should  draw  a  60-days'  sight  bill  for  £100,000  on 
London.  The  sailing  time  from  Melbourne  to  London  is 
ordinarily  about  28  days.  Consequently,  if  the  Law- 
rence Woolen  Company  had  not  already  purchased  Lon- 
don exchange,  they  would  have  been  required  to  purchase 
such  demand  exchange  10  days  prior  to  the  date  at  which 


90      PROBLEMS  IN  FOREIGN  EXCHANGE 

the  sight  draft  on  London  would  fall  due.  With  such 
demand  exchange  selling  at  4.765,  how  much  profit,  if 
any,  did  the  Lawrence  Woolen  Company  make,  allowing  4: 
per  cent  interest  per  annum  on  their  money  ? 

88 

What  is  the  significance  of  the  words  "  Payable  at  the 
drawees'  buying  rate  for  sight  bills  on  London  "  or  of 
some  similar  phrase  appearing  on  a  draft? 

89 

Explain  what  is  meant  by  "  del  credere  business  "  in 
the  case  of  a  bank  receiving  goods  on  consignment  ? 

90 
Prepare  a  statement  on  the  disadvantages  of  foreign 
creditors  when  suing  their  customers  abroad. 

91 

Prepare  a  statement  on  the  subject  of  costs  of  collecting 
foreign  drafts.  Point  out  the  items  that  compose  such 
costs,  how  they  are  figured,  and  what  the  usual  rates  are. 

92 

(a)  What  are  the  points  of  difference  between  a  "  con- 
firmed "  commercial  letter  of  credit  and  an  "  uncon- 
firmed "  commercial  letter  of  credit  ? 

(&)  What  are  the  particular  advantages  of  an  "  uncon- 
firmed "  commercial  letter  of  credit  from  the  point  of 
the  importer? 


FINANCING  IMPORTS  AND  EXPORTS     91 

(c)  Wliy  do  banks  usually  prefer  to  deal  in  "  con- 
firmed "  commercial  letters  of  credit  ? 

93 

An  American  import  house  has  arranged  with  its  New 
York  bank  for  a  confirmed  import  letter  of  credit  dra\vii 
in  sterling  exchange  in  favor  of  a  silk  merchant  in  Kobe. 
Explain  exactly  the  process  by  which  the  credit  would 
be  confirmed,  pointing  out  which  of  the  negotiating 
bankers  would  send  the  confirmation  to  the  Japanese 
merchant, 

94 

Why  do  commercial  letters  of  credit  often  stipulate 
that  the  bills  of  lading  shall  be  drawn  "  To  Order  "  and 
endorsed  in  blank? 

95 

IMake  a  list  of  all  the  papers  that  might  comprise  a 
documentary  bill  and  briefly  describe  the  function  of 
each. 

96 

Prepare  a  tabulation  showing  the  cable  charges  be- 
tween New  York  and  the  important  commercial  cities  of 
the  world. 

97 
A  New  York  bank  has  received  from  its  London  corre- 
spondent the  shipping  documents   (bills  of  lading,  etc.) 
covering  a  cargo  of  hides  purchased  by  a  New  York  im- 
porter from  a  firm  in  Calcutta. 


92     PROBLEMS  IiST  FOREIGIT  EXCHANGE 

(a)  Describe  the  various  arrangements  that  might  be 
made  between  the  bank  and  its  customer  for  the  release 
of  the  shipping  documents. 

(&)  If  the  an-angements  were  that  the  customer  was  to 
sign  a  trust  receipt,  would  the  bank  ordinarily  insist 
that  all  of  the  terms  be  strictly  complied  with,  particularly 
those  concerning  the  method  of  payment?     Explain. 

98 

In  the  financing  of  a  typical  transaction,  as  in  the  case 
of  a  cargo  of  wool  from  Australia  to  Boston,  the  seller 
receives  pay  for  his  goods  as  soon  as  he  is  ready  to  make 
the  shipment.  The  purchaser  does  not  have  to  pay  for 
his  goods  until  after  he  has  received  them.  The  local 
banker  of  the  shipper  is  the  only  one  who  puts  out  any 
money  at  the  start.  He  knows,  however,  that  he  can  re- 
imburse himself  immediatolv  bv  sending  to  anv  of  the 
large  discount  houses  in  London  the  draft  he  has  pur- 
chased from  the  shipper. 

Explain  in  more  detail,  with  particular  reference  to 
the  documents,  just  how  the  arrangements  for  a  ship- 
ment of  this  kind  would  be  made. 

99 

A  Kew  York  importer  has  received  a  shipment  of  silk 
from  India  at  30,000  pounds  sterling  and  subject  to  an 
ad  valorem  duty. 

(a)  Without  knowing  the  exact  character  of  the  goods 
determine  the  approximate  rate  of  duty  that  would  be 
levied  on  this  class  of  merchandise. 


FINANCING  IMPORTS  AND  EXPORTS     93 

(h)  Prepare  a  statement  explaining  how  the  duty  to  be 
collected  is  computed  at  present,  and  compare  this  method 
with  that  used  by  the  Treasury  Department  up  to  the 
latter  part  of  1919. 

100 

Shipping  documents  arising  from  exportations  or  im- 
portations of  merchandise  may  be  surrendered  either  on 
acceptance  or  on  payment,  according  to  the  instructions 
given  by  the  drawers  of  the  bills. 

(a)  What  symbols  are  used  to  indicate  each  of  these 
two  classes  of  bills? 

(&)  In  cases  where  the  relative  documents  of  title  to 
the  goods  are  not  delivered  until  the  bill  is  paid,  what 
necessary  steps  must  banks  take  for  the  protection  of  the 
drawer's  interest  until  such  time  as  the  acceptor  is  ready 
to  take  up  the  bill  ? 

(c)  In  England,  when  bills  are  paid  before  maturity, 
it  is  the  custom  to  allow  a  rebate  of  one-half  per  cent  per 
annum  above  the  London  joint-stock  banks'  advertised  rate 
of  interest  for  short  deposits.  What  is  the  practice  in  the 
United  States? 

(d)  Under  what  conditions  is  each  of  these  two  classes 
of  bills  most  likely  to  be  used  ? 

101 
In  considering  the  financial  hazards  of  foreign  trade  a 
distinction  should  be  made  between  the  risks  occasioned 
by  the  granting  of  credit  by  the  seller  to  the  buyer  and 
the  risks  duo  to  fluctuations  in  the  exchange  rates.  Erom 
the  viewpoint  of  the  merchant  there  are  a  number  of 


94      PROBLEMS  IN  FOREIGN  EXCHANGE 

methods  that  may  be  utilized  to  eliminate  or  reduce  these 
two  kinds  of  risk.  Classify  the  following  foreign-trade 
practices  according  to  whether  they  have  to  do  with  credit 
risks  or  exchange  risks: 

1.  Buying  exchange  for  future  delivery. 

2.  Selling  exchange  for  future  delivery. 

3.  Del  Credere  transactions. 

4.  Drawing  drafts  with  some  such  phrase  as  "  payable 

at  the  A  B  Bank's  drawing  rate  for  demand  bills 
on  London." 

5.  Drawing  bills  with  instructions  "  documents  against 

payment,  d/p." 

6.  Shipper  selling  goods  to  a  foreign  buyer  consigns 

the  merchandise  to  himself  at  the  port  of  destina- 
tion. 

7.  Arranging  for  financing  importations  through  dollar 

acceptances    instead    of    through    the   medium    of 
pounds  sterling. 

8.  Consigning  goods  to  foreign  brokers  for  sale  "  after 

arrival." 

9.  Hedging  in  the  Cotton  Exchange  after  purchasing 

raw  cotton  for  foreign  consignment. 

102 
The  Carlisle  Bag  Company  of  Newark,  New  Jersey, 
contemplate  instnicting  their  purchasing  agent  in  Cal- 
cutta to  buy  for  immediate  shipment  jute,  costing  approx- 
imately 150,000  rupees.  Before  the  War  this  company 
provided  their  Calcutta  agent  with  funds  by  purchasing 


FINANCING  IMPORTS  AND  EXPORTS      95 

rupees  in  London  for  remittance  to  India.  At  this  par- 
ticular time  they  are  following  the  policy  of  making  re- 
mittance in  rupees  directly  from  New  York  to  Calcutta. 
This  plan  makes  it  possible  for  them  to  avoid  the  exchange 
risks  due  to  fluctuations  in  the  rates  for  the  pound 
sterling. 

When  the  Carlisle  Bag  Company  have  decided  to  remit 
to  their  agent  in  India,  they  will  arrange  through  a  New 
York  bank  to  have  the  necessary  number  of  rupees 
forwarded  to  Calcutta.  Upon  settlement  of  the  trans- 
action with  the  local  bank,  the  Carlisle  Bag  Company  will 
receive  a  receipt  with  a  statement  that  a  certain  number  of 
rupees  is  to  be  telegraphed  immediately  to  their  Calcutta 
agent. 

(a)  What  rate  should  the  Carlisle  Bag  Company  pay 
for  the  rupees  if  the  telegraphic  transfer  rate  between  Lon- 
don and  Calcutta  is  2s.  4d.  and  between  New  York  and 
Ix>ndon,  $3.80? 

(b)  What  would  be  the  cost  of  Rs.  150,000  at  the 
above  rate? 

(c)  Point  out  why  remittances  through  London  by 
means  of  telegraphic  transfers  would  cause  the  Carlisle 
Bag  Company  to  assume  greater  risks  than  when  purchas- 
ing funds  for  direct  remittance. 

103 
"  Interest  bills  "  are  very  common  in  connection  with 
shipments  to  India  and  Japan.     Describe  how  they  are 
used.     Is  the  holder  of  an  "  interest  bill  "  legally  bound 
to  accept  payment  before  maturity  ? 


96      PROBLEMS  m  FOREIGN"  EXCHANGE 

104 

The  various  items  handled  by  the  Export  Commercial 
Credit  Department  of  a  large  ISTew  York  bank  are  as 
follows : 

1.  Commercial    credits    covering    exports    opened    by 

foreign  banks,  our  correspondents. 

2.  Commercial     credits    covering    exports    opened    by 

foreign  banks,  not  our  correspondents. 

3.  Commercial  credits  opened  by  foreign  corporations 

or  individuals. 

4.  Guarantee  credits  covering  exports. 

5.  Negotiation  credits. 

6.  Authority  to  purchase  credits. 

7.  Foreign  currency  or  reimbursement  credits. 

8.  Foreign  acceptance  credits. 

9.  Domestic  acceptance  credits. 

10.  Domestic  sight  credits. 

11.  Advances  against  domestic  and  foreign  shipments. 

12.  Advances  against  export  collections. 

13.  Payments  under  credits  issued  directly  by  our 
Domestic  correspondents;  formerly  paid  by  the 
Note  Teller. 

Explain  briefly  the  general  character  of  the  work  in- 
volved in  handling  each  of  these  items. 

105 

The  following  is  a  summary  of  the  work  handled  by 
the  Import  Commercial  Credit  Department  of  a  large 
New  York  bank: 


FINANCING  IMPORTS  AND  EXPORTS     97 

1.  Issue  documentary  credits  available  to  beneficiaries 

in  foreign  countries  in  United  States  dollars. 

2.  Issue  documentary  credits  available  to  beneficiaries 

in  foreign  countries  in  foreign  currencies. 

3.  Issue  clean  credits  available  to  beneficiaries  in  for- 

eign countries  in  United  States  dollars. 

4.  Issue  clean  credits  available  to  beneficiaries  in  for- 

eign co^intries  in  foreign  currencies.  (All  clean 
credits  are  issued  to  finance  the  importation  of 
merchandise.) 

5.  Accept   all   drafts  drawn  under  credits  opened  ia 

dollars. 

6.  Pay  all  drafts  drawn  at  sight  under  credits  opened 

in  dollars.  (Drawings  in  foreign  currencies  are 
honored  by  our  foreign  correspondents  to  the 
debit  of  our  account  under  advice  to  us.) 

7.  Check  and  deliver  all  documents  received  from  our 

correspondents  and  negotiating  banks. 

8.  Collect  all  items  at  maturity. 

Point  out  briefly  the  general  character  of  the  work  in- 
volved in  each  of  these  branches  of  the  Import  Commer- 
cial Credit  Department. 

106 
Below  is  a  list  of  the  various  kinds  of  items  which 
are  handled  by  the  Collection  Export  Department  of  a 
large  New  York  bank : 

1.  Clean  drafts  drawn  on  parties  outside  of  the  United 
States  and  Canada. 


98      PEOBLEMS  IN  FOREIGN  EXCHANGE 

2.  Documentary  drafts  drawn  on  parties  outside  of  the 

United  States  and  Canada. 

3.  Coupons   payable  in  places  outside  of  the  United 

States  and  Canada. 

4.  Bonds  payable  in  places  outside  of  the  United  States 

and  Canada. 

5.  Dividend  warrants  payable  in  places  outside  of  the 

United  States  and  Canada. 

6.  Certificates  of  Deposit  payable  in  places  outside  of 

the  United  States  and  Canada. 

7.  In  fact,   any  kind  of  a  collection  to  be  made  on 

parties  outside  of  the  United  States  and  Canada. 

Briefly  describe  the  activities  of  each  of  these  branches 
of  the  Collection  Export  Department. 

107 

The  work  of  the  Foreign  Import  Collection  Depart- 
ment of  a  large  New  York  bank  consists  of  handling  items 
received  from  its  branches,  foreign  correspondents,  and 
from  others  who  desire  to  have  their  items  collected  and 
the  proceeds  disposed  of  in  accordance  with  the  instruc- 
tions contained  in  their  remittance  letters.  Most  of  the 
items  for  collection  are  received  through  the  mail.  How- 
ever, some  few^  items  are  received  over  the  counter  when 
the  depositor  has  an  agent  or  possibly  a  branch  in  the  city, 
and  the  items  received  for  collection  are  collectible  out- 
side New  York  Citv:  otherwise,  thev  would  be  received 
by  the  Foreign  Tellers'  Department. 

There  are  three  main  divisions  in  the  Department, 
namely.  Cash,  Collections,  and  Discounts. 


FINANCING  IMPORTS  AND  EXPORTS     99 

The  Cash  items  consist  of  the  following  six  sub- 
divisions : 

"  8's,"  that  is,   items  drawn  on  the  bank   depositors. 

Clearing-House  items,  that  is,  items  drawn  on  mem- 
bers of  the  Clearing-House  Association  in  New 
York. 

Large  sights,  that  is,  items  drawn  at  sight  against  con- 
cerns located  below  14th  Street,  for  an  amount  of 
$1,000  or  over. 

Small  sights,  that  is,  items  drawn  at  sight  against  con- 
cerns located  below  14th  Street,  for  an  amount 
less  than  $1,000. 

Treasury  items,  that  is,  items  drawn  against  the 
Treasurer  of  the  United  States  at  sight. 

Transit  items,  that  is,  items  received  from  branches 
only,  dra%vn  at  sight,  without  documents  and  pay- 
able any  place  in  the  United  States  or  Canada, 
which  items  are  handled  the  same  as  if  they  were 
drawn  on  New  York  City. 

(a)  Point  out  briefly  the  significance  of  each  of  these 
subdivisions  of  cash. 

(b)  All  cash  items  are  drawn  in  American  currency 
at  sight  without  documents.  Any  items  not  drawn  in 
American  currency  are  handled  on  a  collection  basis.  Ex- 
plain what  this  means. 

lOS 
Collection  items  refeiTcd  to  in  the  above  problem  con- 
sist of  items  drawn  in  foreign  currencies,  payable  any- 
where in  the  United  States  and  Canada.     They  include 


100      PROBLEMS  IN  FOREIGN  EXCHANGE 

items  drawn  at  more  than  sight,  that  is  from  one  day's 
sight  up  to  6  months  from  sight  or  date,  and  items  which 
have  been  received  without  a  draft,  such  as  bills  of  lading, 
insurance  policies,  and  other  negotiable  instruments  which 
the  bank  is  requested  to  surrender  to  the  drawee  upon  pay- 
ment of  a  stipulated  sum  of  money. 

Illustrate  by  examples  the  methods  of  handling  collec- 
tion items. 

109 

Discounts  referred  to  in  Problem  107  are  those  items 
which  have  been  accepted  by  the  various  drawees  and 
have  been  returned  to  the  New  York  bank.  Upon  advice 
from  the  remitter,  or  in  case  it  is  necessary  to  cover  on 
over-draft  or  some  other  specific  instructions,  these  items 
will  be  discounted  by  the  bank  and  the  net  proceeds 
placed  to  the  credit  of  the  designated  account.  The 
method  of  accomplishing  this  is  briefly  as  follows: 

First,  a  so-called  offering  slip  is  prepared,  which  con- 
tains such  infoi-mation  as  amount  of  bill  to  be  discounted ; 
name  of  remitter ;  name  of  drawee  and  tenor ;  and  also  the 
rate  at  which  this  particular  bill  will  be  discounted,  date 
of  maturity,  and  last  rate. 

These  offering  slips  are  then  sent  to  the  three  Vice- 
Presidents  who  have  charge  of  this  branch  of  the  work. 
Upon  consultation  they  determine  the  rate  at  which  each 
particular  item  is  to  be  discounted.  The  offering  slips 
are  then  returned  to  the  Discounts  Division,  with  the  va- 
rious rates  indicated.  Each  item  is  now  examined  by 
the  discount  clerk  who  determines  the  net  amount  to  be 
deducted  from  the  face.     The  total  of  these  net  amounts 


\ 

FINANCING  IMPORTS  AND  EXPORTS     101 

constitutes  the  sum  to  be  credited  to  the  customer.  The 
work  is  checked  by  a  second  clerk  who  initials  the  entire 
transaction,  thereby  making  the  possibility  of  errors  very 
remote. 

After  issuing  the  proper  credit  tickets  and  preparing  a 
credit  advice  to  be  sent  to  the  beneficiary,  the  credit  advice 
and  credit  tickets  and  the  items  themselves  are  sent  to 
the  Domestic  Discount  Department  to  be  held  until 
maturity. 

As  a  matter  of  record  for  the  Collection  Department  the 
Discounts  Division  maintains  a  detailed  record  of  its 
transactions.  A  card  is  kept  for  each  bank  and  indi- 
vidual for  whom  acceptances  are  discounted.  This  card 
shows  the  amount  discounted,  the  rate,  and  the  maturity 
date  of  each  particular  item,  as  well  as  the  number  of  these 
items.  A  card  record  is  also  kept  for  each  drawee  of  bills 
that  have  been  discounted  against  these  drawees.  This 
record  gives  the  amount  of  the  bill,  the  bank's  number  and 
the  tenor  and  maturity  date  of  the  particular  bill. 

Design  a  copy  of  the  forms  and  records  required  in 
the  Discounts  Division  just  described. 

110 
The  Foreign  Discount  Department;  of  a  large  New 
York  bank  not  only  earns  profits  in  the  form  of  commis- 
sions, but  acts  as  one  of  the  media  through  which  deposits 
are  loaned  at  interest.  It  performs  this  service  in  two 
ways;  first,  by  discounting  bills  drawn  in  dollars,  and 
second,  by  purchasing  bills  drawn  in  foreign  currency. 
Aside  from  the  fact  that  all  paper  dealt  in  by  this  de- 


102      PROBLEMS  m  FOREIGI^  EXCHANGE 

partment  must  be  payable  in  a  foreign  country,  it  will 
discount  and  purchase  any  and  all  forms  of  such  paper, 
including  documentary  bills  of  exchange,  clean  bills  of 
exchange,  and  any  other  written  orders  for  the  payment 
of  money  at  a  foreign  point  in  the  nature  of  checks,  divi- 
dend warrants,  money  orders,  etc. 

Give  an  illustration  of  each  of  the  different  kinds  of 
paper  referred  to. 

Ill 

The  work  of  the  Foreign  Discount  Department  referred 
to  in  Problem  110  consists  of  two  main  subdivisions  or 
sections,  the  one  handling  the  offerings  until  they  are  re- 
mitted abroad,  and  the  other  attending  to  all  irregularities 
and  otherwise  keeping  track  of  the  items  until  the  pro- 
ceeds have  safely  arrived  and  the  entire  transaction  is 
closed  on  the  books.  Most  of  the  items  received  are  docu- 
mentary bills  of  exchange  covering  exports  from  the 
United  States.  They  are  received  at  the  department 
window  from  exporters,  manufacturers,  and  forwarding 
agents.  Usually  the  docimaents  are  complete,  that  is,  the 
set  consists  of  the  bills  of  exchange  or  drafts,  a  full  set  of 
bills  of  lading,  marine  insurance  certificates,  consular  in- 
voice, merchandise  invoices,  certificates  of  origin,  and 
health  certificates,  the  latter  two  depending  on  the 
nationality  of  the  consignee  and  the  nature  of  the  com- 
modity shipped.  Oftentimes,  however,  the  shipper  will 
forward  some,  or  all,  of  the  documents  directly  to  the 
customer,  giving  the  bank  a  guarantee  for  the  non-pro- 
duction of  said  documents. 


FINANCING  IMPORTS  AND  EXPORTS      103 

What  is  the  purpose  of  this  procedure  on  the  part  of 
the  bank's  customer? 

112 

Pound  sterling  items  drawn  on  the  colonies  are  handled 
in  an  interesting  manner  by  the  Foreign  Discount  Depart- 
ment referred  to  in  Problem  110.  They  are  also  particu- 
larly profitable  because  Australian  banks  rebate  to  the 
New  York  bank  a  portion  of  their  regular  commissions. 
The  original  draft,  together  with  original  documents,  are 
despatched  to  Australia  and  the  remittance  statement  is 
stamped : 

[Colonial  Clause] 

Payable  with  exchange  and  Duplicate  draft  and  docu- 
English  and  Colonial  stamps  meuts  have  been  for^-arded  to 
at  the  current  rate  for  nego-  your  London  office  for  nego- 
tiating bills  in  London  on  the  tiation  and  payment  of  pro- 
Colonies,  ceeds  to  the  [insert  name]  in 

London. 

The  drafts  are  also  stamped  with  colonial  clause. 

The  duplicate  draft  and  documents  are  forwarded  to  the 
London  Office  of  Australian  Bank  to  which  the  original 
has  been  despatched  with  the  following  instructions : 

Payable  with  exchange.  .  .  .  Original    draft   and    docu- 

[in  full  same  as  above]     ments   have   been   forwarded 

to  your  [city  in  colony]  of- 
fice. Please  negotiate  this 
draft  and  pay  proceeds  to  the 
[insert  name]  in  Loudon, 
plus  your  usual  commission, 
for  the  credit  of  our  account. 


104      PROBLEMS  IN  FOREIGN  EXCHANGE 

In  this  manner  the  London  account  of  the  New  York 
bank  receives  immediate  credit  for  the  face  amount  of  the 
remittance,  because  of  the  fact  that  the  draft  is  made  pay- 
able at  the  current  rate  for  negotiating  bills  in  London  on 
the  colonies,  together  with  exchange  and  all  stamp  charges. 
An  Australian  draft,  irrespective  of  its  tenor,  is  nego- 
tiated by  the  New  York  bank  at  the  demand  rate  on 
London.  The  New  York  bank  is  out  of  funds  merely 
for  the  time  required  for  the  voyage  to  London  and  the 
drawee  is  obliged  to  meet  all  the  charges  calculated  by  the 
London  and  Australian  banks. 

Explain  at  greater  length  the  method  of  handling 
pound-sterling  items  drawn  on  the  colonies. 

113 

Explain  the  significance  of  each  of  the  following  clauses 
used  by  the  Foreign  Discount  Department  referred  to  in 
Problem  110  on  its  statements  sent  to  corresponding 
banks. 

(a)  "  Please  endeavor  to  collect  this  item  at  such  a  rate 
that  you  can  instruct  us  to  debit  your  account  for 
the  face  amount  together  with  charges  as  indicated 
on  the  schedule,  upon  receipt  of  advice  of  pay- 
ment" 

(b)  "  Please  endeavor  to  collect  this  item  at  such  a 
rate  that  you  can  remit  us  approved  bankers'  check 
on  New  York  for  face  amount." 

(c)  "  Kindly  collect  this  draft,  plus  our  charge  of  ...  . 
together   with    interest    at    ....    per    cent   from 


FINANCING  IMPORTS  AND  EXPORTS      105 

date  of  draft  until  approximate  arrival  of  pro- 
ceeds in  New  York.  Stamps  and  all  jour  charges 
are  to  be  collected  from  the  drawee." 

(d)  "  Payable  by  demand  draft  on  New  York." 

(e)  "  Payable  at  the  current  rate  of  exchange  for 
check  on  New  York  with  interest  at  ....  per  cent. 
P.  A.  from  date  hereof  until  approximate  date  of 
arrival  of  cover  in  New  York,  together  with  all 
collection  charges  and  other  expenses." 

114 

All  time  sterling  drafts  dravm  documents  against  pay- 
ment received  by  the  Foreign  Discount  Department  re- 
ferred to  in  Problem  1 1 0  must  bear  a  stamp  reading : 

Documents  can  be  surrendered  to  drawers  against  payment 
of  draft  under  rebate  of  interest  at  V2  per  cent  above  the  rate 
allowed  by  leading  joint  stock  banks  for  deposits  at  7  days' 
notice. 

This  in  effect  means  a  rebate  of  how  much  below  the 
bankers'  rate? 

115 

During  the  War,  when  sailings  were  so  irregular,  the 
Foreign  Discount  Department  referred  to  in  Problem  110 
discounted  bills  for  its  customers  upon  the  condition  that 
if  the  voyage  required  a  longer  period  than  was  estimated 
in  calculating  the  rate,  the  bank  should  have  the  privilege 
of  charging  interest  for  the  additional  time.  This  was 
done  particularly  in  the  case  of  South  American  bills  and 
a  statement  to  this  effect  was  printed  upon  the  forms  on 


106      PROBLEMS  IN  FOREIGN  EXCHANGE 

which  was  prepared  the  customers'  memorandum  of  pur- 
chase. Since  the  war  there  has  been  a  decided  tendency 
to  reestablish  flat  rates. 

Discuss  the  reasons  for  the  above  conditions. 

116 

The  Bookkeeping  and  Adjustment  Section  of  the  For- 
eign Discount  Department  of  the  New  York  bank  re- 
ferred to  in  Problem  110  includes  the  bookkeepers  of  the 
cage,  the  correspondents,  the  tracers  of  items  remaining 
overdue,  and  the  clerks  in  charge  of  claims  for  delays  in 
transit.  The  duties  of  the  section  are  replete  with  detail 
and  require  at  all  times  tact,  alertness,  and  accuracy. 

Let  us  consider  a  concrete  example.  Assume  that  on 
November  1,  we  discount  an  item  drawn  on  Jose  Garcia 
of  Lima  at  90  days'  sight,  for  the  sum  of  $945,32.  The 
item  is  forthwith  remitted  to  the  New  York  bank's  corre- 
spondent in  Lima,  Banco  del  Peru  Londres,  with  instruc- 
tions : 

Please  endeavor  to  collect  this  item  at  such  a  rate  that  3'ou 
can  instruct  us  to  debit  your  account  for  the  face  amount  upon 
receipt  of  advice  of  payment. 

Assume  that  there  has  also  been  assigned  to  the  item  the 
serial  number  284790. 

In  paying  the  seller  of  the  draft  the  New  York  bank 
deducted  a  discount  of  2%  per  cent,  or  $25.98.  and  paid 
him  the  proceeds  amounting  to  $919.34.  The  discount 
rate  of  2%  per  cent  takes  into  consideration  the  fact  that 
the  New  York  bank  is  to  be  without  the  proceeds  of  the 


FINANCING  IMPORTS  AND  EXPORTS      107 

item  for  a  period  of  5  months,  allowing  GO  days  for  time 
in  transit.  In  the  event  that  the  proceeds  arrive  in  the 
form  of  an  advice  of  payment  on  or  about  the  first  day  of 
May,  the  department  will  close  out  the  transaction  by  sim- 
ply putting  through  at  such  time  the  customary  tickets  of 
liquidation,  crediting  Bills  Discounted  Ledger  for  face 
amount  of  the  item,  debiting  the  correspondent  bank  for 
net  amount  of  the  collection,  and  debiting  the  difference  to 
discount  account,  thus  absorbing  the  charges  of  the  corre- 
spondent in  the  original  discount  charge  of  2%  per  cent. 
About  December  10  there  is  received  a  cable  from  Lima 
reading : 

Remittance  284790  not  accepted.  Garcia  demands  rebate 
20  per  cent  goods  not  as  ordered. 

Immediately  upon  receiving  this  cable,  the  correspon- 
dent notifies  the  drawer  by  telephone  or  by  telegraph,  and 
confirms  the  same  by  letter.  The  clerk  in  charge  of  the 
obligors'  books  also  takes  note  of  this  cable  and  marks  his 
books  in  such  a  manner  that  he  will  not  consider  this 
item  as  having  been  accepted  or  paid,  unless  he  receives 
definite  information  to  this  effect.  The  Bills  Discounted 
bookkeeper  also  notes  the  contents  of  the  cable  in  his 
books  for  his  future  guidance.  The  correspondent  with- 
draws from  the  departmental  files  the  office  copy  of  the 
remittance  letter  and  notes  thereon  all  action  taken  with 
respect  to  the  item.  He  will  then  prepare  cable  charge 
tickets,  obtain  the  cost  of  this  incoming  cable  from  the 
Cable  Department,  and  mail  the  drawer  a  bill  for  such 
charges. 


108     PEOBLEMS  m  FOKEIGN"  EXCHANGE 

Complete  the  explanation,  showing  how  this  transaction 
might  finally  he  settled. 

117 

In  the  case  of  certain  customers  and  when  it  is  quite 
difficult  to  estimate  one  of  the  elements  which  are  con- 
sidered in  making  up  a  definite  rate,  the  New  York  bank 
referred  to  above  discounts  bills  upon  a  basis  of  "  subject 
to  adjustment."  This  simply  means  that  at  the  outset  the 
bank  advances  to  the  customer  80  per  cent  or  90  per 
cent  of  the  face  amount  of  the  bill  and  credits  the  balance 
to  a  capital  account  known  as  "  Funds  Retained."  When 
the  bank  receives  the  advice  of  payment,  it  deducts  its  ex- 
act charges  from  the  funds  retained  and  returns  the  bal- 
ance to  the  customer.  In  some  cases  the  bank  advances  to 
the  customer  at  the  outset  the  face  amount  and  sends  him  a 
debit  memorandum  for  the  exact  charges  upon  receiving 
the  advice  of  payment. 

Illustrate  more  fully  the  above  explanation. 

118 
In  adjusting  an  item  bought  "  subject  to  adjustment," 
what  is  the  usual  charge  of  a  bank  for  rendering  this 
service  ? 

119 
The  following  is  a  brief  summary  of  the  different  types 
of  transactions  handled  in  the  Foreign  Tellers'  Depart- 
ment of  a  large  New  York  bank. 

1.  Receiving  New  York  deposits  from  domestic  sources 
for  deposit  to  foreign  accounts.     (This  is  the  regu- 


FINANCING  IMPOKTS  AND  EXPORTS      109 

lar  receiving  teller's  operation  and  closely  resem- 
bles the  work  done  in  the  Foreign  Collection  Im- 
port Department,  the  only  difference  being  that  the 
Foreign  Tellers'  Department  receives  New  York 
funds  from  domestic  sources,  whereas  the  Foreign 
Collection  Import  Department  gets  all  deposits  by 
mail  from  foreign  sources  and  out-of-town  checks 
from  domestic  sources.) 

2.  Paying  checks  drawn  against  depositors  who  main- 

tain balances  on  our  foreign  books.  (This  work 
has  been  largely  taken  over  by  the  regular  paying 
teller  on  the  bank  floor  who  is  now  paying  both  do- 
mestic and  foreign  checks.) 

3.  Making  payments  to  domestic  sources  by  order  of 

foreign  clients.  (This  comprises  a  large  portion 
of  the  work  on  one  side  of  the  Department.) 

4.  Handling  "  receive  cables,"  in  other  words,  cables 

indicating  that  we  are  to  receive  certain  amounts 
from  designated  sources  for  account  of  the  bank, 
firm,  or  individual  cabling  us. 
6.  Selling  drafts  in  foreign  currency  on  our  branches 
or  foreign  correspondents  who  are  located  in  all 
parts  of  the  world. 

6.  Issuing  letter  payments  through  our  branches  or  for- 

eign correspondents. 

7.  Drawing  drafts  in  United  States  dollars  payable 

at  sight  rate  for  drafts  on  New  York  in  places 
where  it  is  not  possible  to  draw  in  foreign  cur- 
rency. 


110      PROBLEMS  IN  FOREIGN  EXCHANGE 

8.  Selling  cable  transfers  payable  through  our  branches 

or  foreign  correspondents. 

9.  Buying  cable  transfers. 

10.  Buying  and  selling  foreign  specie  as  an  aocommo 

datipn  to  the  bank's  customers. 

11.  Operating  the  Cash  Journal,  through  which  pass 
checks  received  by  the  various  departments  which 
are  credited  as  cash  and  collected  through  the  City 
Collection  Department,  Country  Collection  De- 
partment, and  other  collecting  departments  in  the 
bank. 

Illustrate  by  example  the  different  types  of  transactions 
handled  in  the  Foreign  Tellers'  Department. 

120 

Behrman  and  Company  of  Philadelphia  have  shipped 
some  merchandise  to  a  firm  in  Holland  and  have  drawn  a 
60-davs'  siffht  bill  on  a  Rotterdam  bank.  Determine  the 
price  the  Philadelphia  firm  will  be  able  to  obtain  for  the 
draft  from  their  local  bankers  with  the  conditions  as 
given : 

1.  Basis  of  calculations:  100  florins  =  $40. 

2.  Discount  to  be  deducted  by  Holland  banker  60  days' 

interest  at  bank  rate,  5  per  cent. 

3.  Dutch  stamp  charges  l/o  per  cent. 

4.  Margin  of  profit  for  Philadelphia  bank  ^  per  cent. 

5.  Commission  charged  American  account  by  Holland 

banker  14  P^^  cent. 


FINANCING  IMPORTS  AND  EXPORTS      111 

121 

A  New  York  exporter  has  shipped  some  perishable 
goods  to  a  merchant  in  IJverpool  and  has  dra\vn  on  him 
a  60-days'  sight  draft,  documents  deliverable  against  pay- 
ment. Determine  the  price  that  the  New  York  ex- 
porter will  be  able  to  obtain  for  his  draft  from  his  bankers 
under  the  following  conditions: 

1.  New  York  rate  for  demand  drafts  on  London  4.05. 

2.  Retirement  rate  of  discount  at  which  draft  may  be 

retired  at  option  of  drawee,  under  rebate  4  per 
cent. 

3.  Commission  of  London  banker  1/40  per  cent. 

4.  English  stamp  charges  1/20  per  cent. 

5.  Margin  of  profit  for  American  bank  ^4  c^^*  P^^ 

pound. 

122 

What  price  can  an  American  banker  pay  for  a  30-days' 
sight  draft  on  a  French  merchant,  documents  deliverable 
against  payment  ?     The  conditions  are  as  stated  below : 

1.  New  York  rate  for  banker's  checks  on  Paris  10.75 

francs. 

2.  Discount  to  be  deducted  by  French  banker,  or  re- 

bated to  drawee  if  paid  on  presentation,  30  days' 
interest  at  bank  rate  5  per  cent. 

3.  French  banker's  commission  1/40  per  cent. 

4.  French  bill  stamp  1/20  per  cent. 

5.  Margin  of  profit  for  American  bank  1/20  per  cent. 


112      PROBLEMS  IN  FOREIGN  EXCHANGE 

123 

You  have  at  your  disposal  in  financing  your  export  ship- 
ments 7  important  methods  (I  enumerate  them  in  this  inaccu- 
rate way  merely  for  convenience)  :  (a)  Cash  in  New  York  or 
cash  with  order;  (6)  cash  against  documents;  (c)  sight  draft; 
(d)  30  days'  sight;  (e)  90  days'  sight;  (/)  long  time  credits 
with  interest;  (g)  open  account  or  open  credit.  (W.  C. 
Downs,  formerly  United  States  commercial  attache  at  Mel- 
bourne, Australia,  in  Proceedings  of  Second  National  Foreign 
Trade  Convention.) 

Point  out  more  fully  hov^r  the  exporter  is  actually  reim- 
bursed in  each  of  the  seven  methods. 


VI 

ARBITRAGE  TRANSACTIONS  AND  FINANCE  BILLS 

124 

Arbitrage  in  exchange  consists  essentially  in  buying 
drafts  in  one  place  at  a  low  price  and  selling  them  in 
another  at  a  high  price.  Suppose  that  franc  drafts  on 
Paris  are  selling  in  New  York  at  the  rate  of  8.00  (that 
is  8  francs  for  a  dollar),  while  pound  sterling  drafts  on 
London  are  selling  in  New  York  at  4.20  (that  is  $4.20 
per  pound  or  .238  pounds  per  dollar).  Suppose  further 
that  franc  drafts  on  Paris  are  selling  in  London  at  the  rate 
of  34.50  francs  for  a  pound  sterling. 

(a)  Assuming  that  the  above  rates  are  for  cable  trans- 
fers, compute  the  profit  (before  brokerage  commissions 
and  other  expenses  are  deducted)  that  a  New  York  banker 
might  make  through  the  use  of  $50,000. 

(6)  Explain  why  the  opportunity  for  making  a  profit 
of  this  kind  must  be  grasped  immediately  and  why  such 
arbitrage  transactions  tend  to  cause  the  chance  for  profit 
to  disappear. 

125 

Foreign  exchange  rates  in  both  directions  between  two 
places  tend  to  correspond;  for  instance,  when  sterling  ex- 
change is  at  a  discount  in  New  York,  say  at  $4.85,  dollar 

exchange  in  London  will  be  at  a  premium.     In  other 

113 


114      PROBLEMS  IN  FOREIGN"  EXCHANGE 

words,  when  it  is  possible  to  purchase  in  New  York  the 
right  to  obtain  a  pound  sterling  in  London  for  $4.85,  a 
pound  sterling  in  London  would  ordinarily  be  able  to 
obtain  only  the  right  to  $4.85  in  New  York,  the  dollar 
costing  in  London  49.50  pence,  instead  of  49.316  pence, 
the  par  value.  Assume  that  the  rate  in  New  York  sud- 
denly goes  to  par,  without  a  corresponding  change  in  Lon- 
don. Explain  how  a  New  York  bank  having  a  London 
correspondent  might  take  advantage  of  the  situation,  and 
show  how  much  profit  (before  allowing  for  cable  and 
commission  charges)  might  be  made  from  the  sale  of 
$100,000  in  London. 

126 

A  London  banking  house  decides  to  have  its  New  York 
correspondent  loan  £120,000  in  the  New  York  market. 
Accordingly  the  New  York  bank  draws  £120,000  of  90- 
days'  sight  bills  and  turns  them  over  to  Patterson  Bros., 
brokers,  at  4.81.  The  latter  sell  the  bills  immediately  at 
an  average  of  4.81%.  Ten  days  prior  to  maturity  the 
New  York  bank  sends  a  demand  draft  on  London  plus 
l^  per  cent  commission  to  the  London  bank.  The  New 
York  bank  purchased  this  demand  draft  in  the  open  mar- 
ket at  4.845. 

(a)  Determine  the  profit  of  the  New  York  bank  upon 
the  transaction.  The  New  York  bank  has  available  funds 
which  it  values  at  31/2  P^''  ^^nt  interest  per  annum. 

(6)  Describe  the  various  documents  that  would  be  in- 
volved and  explain  the  conditions  that  would  render  a 
transaction  of  this  kind  profitable. 


AEBITRAGE  AND  FINANCE  BILLS       115 

127 
A  New  York  bank  has  drawn  a  90-days'  sight  bill  on 
London  for  which  it  must  remit  at  once.  With  New 
York  cable  transfers  on  London  selling  at  $4.76  and  Lon- 
don cables  selling  in  Paris  at  27.50  francs  per  pound 
sterling,  what  is  the  highest  rate  the  New  York  bank  can 
afford  to  pay  in  New  York  for  exchange  on  Paris  to  be 
used  there  for  purchasing  the  required  London  cables  ? 

128 

Prepare  an  exchange  table  for  dollars  and  francs  at 
the  rate  of  5.171/^  for  any  sum  up  to  1,000,000  francs  or 
dollars. 

The  following  is  an  exchange  table  for  the  rate  5.16%- 


Fra,ncs 

Dollars 

Dollars 

Francs 

1 

.1934704 

1 

5.16875 

2 

.3869408 

2 

10.33750 

3 

.5804111 

3 

15.50625 

4 

.7738815 

4 

20.67500 

5 

.9673519 

5 

25.84375 

6 

1.1608223 

6 

31.01250 

r 

1.3542926 

7 

36.18125 

8 

1.5477630 

8 

41.35000 

9 

1.7412234 

9 

46.51875 

129 
From  the  table  in  Problem  128  determine  the  price  of 
974  francs  at  5.171/2- 
Tabulate  your  result  in  the  following  form : 


116      PROBLEMS  IN  FOREIGN  EXCHANGE 

900   francs  =  

70   francs  =  

4   francs  =  

Total  =  

130 

The  following  is  a  table  showing  parities  in  dollars, 
francs,  and  pounds  sterling: 


£1 

25.20 

25.21 

25.22 

25.23 

25  24 

25.25 

$1 

$1 

$1 

$1 

$1 

$1 

$4.85 

4.8514 
4.85  Vi 
4.85% 

5.1959 
5.1!»32 
5.1905 
5.1879 

5.1979 
5.1953 
5.1926 
51900 

5.20 
5.1973 
5.1947 
5.1920 

5.2021 
5.1994 
5.1967 
5.1940 

5.2041 
5.2014 
5.1988 
5.1961 

6.2062 
5.2035 
5.2008 
5.1982 

Make  a  similar  one  for  pounds,  marks,  and  dollars. 

When  the  New  York  quotation  for  sterling  is  $4.85 
and  the  London  quotation  for  francs  is  25.20,  the  New 
York  parity  quotation  for  francs  is  5.1959.  If  the  market 
differs  from  this  there  is  opportunity  for  arbitrage. 


131 

From  the  table  you  have  just  made  illustrate  a  situation 
in  which  there  would  be  opportunity  for  arbitrage. 

132 

By  use  of  the  Chain  Rule  determine  the  parity  of  the 
Sovereign  in  New  York  under  the  following  conditions : 

1.  Berlin  check  rate  on  New  York  is  94.5  cents  for  4 

marks ; 

2.  Berlin  check  rate  on  London  21  marks  per  £1. 


ARBITRAGE  AND  FINANCE  BILLS      117 

133 

In  reference  to  arbitrage  transactions  in  gold  E.  L. 
Stewart  Patterson,  in  liis  book  Domestic  and  Foreign 
Exchange,  points  out  that  under  the  following  conditions 
there  is  practically  no  profit  or  loss  to  be  obtained  by  the 
so-called  triangular  operation  in  which  gold  is  shipped 
to  Paris  or  some  other  European  market  for  the  purpose 
of  buying  exchange  on  London: 

New  York  on  London   $486.70 

Paris  Exchange  on  London 25.10 

Money  in  New  York 2  per  cent 

(a)  Show  a  detailed  computation  to  illustrate  the  above. 

(b)  What  does  it  imply  in  regard  to  the  exchange  mar- 
ket when  gold  is  shipped  from  one  country  to  another? 
Explain. 

134 

Finance  bills  are  commonly  used  to  anticipate  a  fall  in 
exchange  rates.  For  instance,  imder  normal  conditions 
large  autumn  shipments  of  cotton  and  wheat  cause  the 
rates  on  sterling  exchange  to  drop  from  previous  higher 
levels  in  the  summer  months.  On  August  20  a  New  York 
banker  wishing  to  take  advantage  of  an  expected  drop  in 
exchange  rates  an-anges  with  his  London  correspondent 
for  a  60-days'  credit  of  £25,000,  by  pledging  securities  for 
his  account  at  an  acceptable  New  York  depositary,  al- 
though very  often  in  such  cases  a  credit  is  extended  with- 
out any  collateral  requirements.  The  New  York  banker 
immediately  proceeds  to  draw  a  GO-days'  sight  bill  on 


118      PROBLEMS  IN  FOREIGN  EXCHANGE 

London.  He  may  dispose  of  this  bill  by  selling  it  at  the 
market  rate  for  60-day  bills,  or  he  may  send  it  to  London 
to  be  discounted  and  sell  his  own  demand  drafts  against 
the  proceeds  of  the  credit  thus  obtained. 

(a)  Under  the  following  conditions  what  would  be  the 
profit  or  loss  that  would  result  from  the  sale  of  the  pro- 
ceeds in  the  form  of  a  demand  draft? 

1.  August  20th   demand   rate  for  sterling  4.88. 

2.  London  discount  rate  for  60-days'  sight  bills  3  per 

cent. 

3.  London  stamp  charges  1/20  per  cent. 

4.  London  banker's  commission  !/§  per  cent. 

5.  New  York  banker  employs  funds  at  4  per  cent. 

6.  Ten  days  before  maturity  of  the  London  draft  the 

New  York  banker  remits  with  a  demand  draft  pur- 
chased at  4.84. 

(6)  Under  the  conditions  mentioned  in  (a)  what  would 
have  been  the  lowest  rate  at  which  the  New  York  banker 
could  have  afforded  to  sell  the  draft  as  a  60-day  bill  instead 
of  as  a  demand  bill  ? 

(c)  Explain  how  the  use  of  finance  bills  tends  to  sta- 
bilize exchange  rates. 

135 

A  New  York  banker  desires  to  remit  at  once  to  Lon- 
don in  order  to  meet  some  long  bills  maturing  12  days 
hence  when  the  next  New  York  mail  is  due  in  London. 
The  New  York  banker  can  loan  money  in  New  York  at  6 
per  cent  and  borrow  in  London  at  5  per  cent.     If  the  rate 


ARBITRAGE  AND  FINANCE  BILLS       119 

for  sterling  spot  cables  is  $3.8625,  the  rate  for  demand 
bills  $3.8570,  and  the  rate  for  12-day  future  cables 
$3.8G20,  which  of  the  three  forms  of  remittance  will  cost 
him  least  ? 

136 
Assume  the  conditions  in  Problem  135. 

(a)  Which  two  classes  of  exchange  would  a  banker 
select  for  the  most  profitable  arbitrage  transaction? 

(b)  What  would  be  the  arbitrageur's  profit  on  £100,- 
000  of  whichever  form  of  exchange  he  sold  on  the  opera- 
tion? 

137 
A  New  York  banker  purchases  £150,000  of  60-days' 
sight  bills  at  $4.82  for  investment  to  maturity  and  sells 
against  them  demand  drafts  for  delivery  at  the  end  of 
63  days  at  the  rate  of  $4.86%.  Assuming  that  the  de- 
mand exchange  will  be  cashed  on  the  day  the  long  bills 
are  paid,  what  interest  rate  will  the  New  York  banker 
obtain  from  the  investment  ? 

'  138 

(a)  Referring  to  the  table  of  exchange  on  Paris  on  page 
120,  on  which  day  do  the  rates  between  New  York  and 
Paris  o5er  the  greatest  opportunity  for  making  profit  by 
an  arbitrage  operation? 

(b)  Assume  a  triangular  exchange  operation  with  New 
York,  Paris,  and  a  third  city  involved.  Determine  the 
New  York  parity  quotation  on  London,  Geneva,  Amster- 
dam, Brussels,  Barcelona,  and  Milan  for  April  7,  16, 
and  30. 


120      PROBLEMS  IN  FOREIGN  EXCHANGE 


ExCHANaE    ON    PaHIS,    ApRlL,    1920 


•st 

«« 

s 

o 

09 
U 

-  = 

•0 

M      «- 

s 

0 

><- 

1^ 

Is 

<  <a 

rto 
m 

<  m 

|2 

Ml 

.So 
go 

13 

a     u 
o    fe 

a  o  a 

'% 

m 

^ 

"3 
05 

■3 

1 

14.57 

57.50 

38.35 

18.30 

94.12 

38.40 

140.50 

14.73 

14.70 

1.43 

8 

57.625 

140.75 

5 

14.47 

1.50 

6 

14.79 

37.50 

18.325 

93.75 

36.75 

142.00 

14.75 

14.69 

1.51 

7 

15.24 

61.175 

36.10 

17.60 

92.37 

36.25 

144.00 

15.34 

15.25 

1.55 

8 

15.27 

61.05 

35.975 

17.70 

93.87 

36.20 

149.00 

15.26 

15.27 

1.71 

9 

15.77 

63.10 

35.70 

17.225 

93.62 

35.30 

154.50 

15.81 

15.30 

1.74 

10 

16.27 

64.95 

34.15 

34.70 

157.50 

1.82 

12 

17.10 

63.35 

32.40 

16.05 

92.75 

33.60 

159.00 

16.97 

17.00 

1.97 

13 

16.37 

66.70 

16.35 

93.00 

34.10 

17.05 

17.03 

1.81 

14 

16.17 

63.10 

35.90 

17.25 

93.75 

35.80 

16.025 

16.00 

1.63 

15 

16.34 

66.125 

16.50 

93.12 

34.75 

141.50 

16.79 

16.65 

1.71 

16 

16.37 

65.45 

33.55 

16.40 

93.50 

35.50 

141.25 

16.46 

16.46 

1.64 

17 

16.22 

65.25 

33.85 

35.20 

141.50 

1.59 

19 

16.05 

63.35 

34.30 

16.55 

94.00 

36.25 

140.00 

16.22 

16.10 

1.59 

20 

16.18 

63.10 

35.90 

17.40 

94.87 

36.50 

136.00 

15.99 

16.00 

l.fil 

21 

16.37 

64.85 

33.60 

16.525 

94.12 

35.45 

138.00 

16.42 

16.37 

1.65 

22 

16.60 

64.80 

34.05 

16.40 

94.12 

35.65 

139.00 

16.61 

16.58 

1.61 

23 

16.78 

64.75 

33.80 

16.475 

93.75 

35.50 

132.25 

16.635 

16.65 

1.60 

24 

16.94 

65.15 

33.75 

141.00 

1.63 

26 

17.00 

65.55 

33.275 

16.25 

93.25 

35.10 

137.50 

1.69 

27 

17.00 

64.675 

33.25 

16.20 

93.75 

34.85 

17.08 

17.11 

1.73 

28 

16.52 

64.30 

16.25 

93.75 

35.65 

136.75 

16.775 

16.80 

1.70 

29 

34.05 

16.39 

16.39 

30 

16.70 

64.15 

33.85 

16.55 

93.87 

35.25 

137.00 

16.665 

16.65 

1.71 

The  Review,  May  15,   1920. 


139 

(a)  If  sterling  cables  are  quoted  at  25.20  lire  in  Rome 
and  $4.8550  in  New  York,  what  is  the  triangular  parity 
rate  of  lire  cables  in  New  York  ? 

(&)  Assuming  that  the  market  rate  for  Genoa  cables  in 
New  York  is  5.17^/2  lire,  what  profit  per  pound  will  a 
New  York  banker  realize  on  a  triangular  arbitrage  oper- 
jatioja  between  the  three  cities? 


AEBITRAGE  AND  FINANCE  BILLS      121 

140 

(a)  If  the  market  rate  for  sterling  cables  is  12.00 
guilders  in  Amsterdam  and  $4.8750  in  New  York,  what 
is  the  triangular  parity  rate  of  guilder  cables  in  New 
York? 

(&)  Assuming  that  the  market  rate  for  Amsterdam 
cables  in  New  York  is  $.409,  what  profit  will  a  New  York 
banker  realize  per  pound  on  an  arbitrage  operation  be- 
tween the  three  centers  ? 

141 

Trading  propositions  handled  by  the  Foreign  Traders' 
Department  of  a  certain  New  York  bank  include  these 
thirteen  kinds  of  transactions : 

1.  Straight  buying  and  selling  of  all  currencies :  pounds 

for  pounds;  francs  for  francs. 

2.  Buying  one  currency  against  a  sale  of  another  cur- 

rency: pounds  against  francs,  etc.,  and  vice  versa. 

3.  Spot  sales  sometimes  called  short  sales. 

4.  Future  sales  sometimes  called  forward  delivery. 

5.  Forward  purchases  and  sales  against  spot. 

6.  Spot  against  futures. 

T.  Spot  and  futures  against  advances  or  overdrafts. 

8.  Swaps:   that   is,   cable   sales   against  exchanges   in 

transit  as  a  rule. 

9.  Purchases  for  building  up  deposits  (investments  in 

foreign  currency). 

10.  Borrowing  balances  (of  branches,  particularly)  for 

purposes    of    employing    their    tied-up    balances 
abroad  until  they  can  get  out  of  their  position. 


122      PROBLEMS  m  FOREIGN  EXCHANGE 

11.  Foreign  currency  accounts  on  books  of  head  office  on 

interest  basis.     These  funds  may  be  employed  by 
any  trader  prior  to  payment. 

12.  Sales  and  purchases  of  exchange  against  bullion. 

13.  Options,  puts,  calls.     These  three  are  highly  spec- 
ulative. 

Outline  in  greater  detail  the  banking  operations  in- 
volved in  each  of  these  trading  propositions. 


VII 

GENEEAL  PROBLEMS 

142 

A  certain  investment  house  dealing  In  options  in  foreign 
exchange  makes  the  following  offers : 

1.  $50  buys  a  call  on  10,000  marks  at  4  cents  good  for 

9  months. 

2.  $50  buys  a  call  on  10,000  francs  at  7.75  good  for 

9  months. 

3.  $50  buys  a  call  on  10,000  lire  at  9.05  good  for 

9  months, 

(a)  Explain  precisely  what  are  the  rights  of  the  buyer 
of  one  of  these  calls  in  foreign  exchange. 

(b)  Why  are  dealings  of  this  kind  different  than  trans- 
actions on  a  margin  ? 

(c)  Show  why  the  seller  is  bound  to  gain  on  a  falling 
exchange  market  and  why  he  is  likely  to  lose  on  a  rising 
exchange  market  unless  he  has  been  able  to  cover  before 
the  rise. 

(d)  How  much  profit  could  a  buyer  make  who  had  pur- 
chased a  call  on  10,000  marks  at  4,  if  the  market  price 
went  to  5  within  the  period  covered  by  the  option  ?  How 
much  could  he  lose  if  the  market  price  of  marks  fell  to 
2^4  within  the  period  covered  by  the  option? 

123 


124      PROBLEMS  m  FOREIGN  EXCHANGE 


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GENERAL  PROBLEMS  125 

143 

Make  a  list  of  the  various  instruments  that  are  used  for 
remittances  in  settling  international  debts, 

144 

Make  a  list  of  the  functions  of  the  Foreign  Department 
of  a  bank  showing  particularly  how  these  are  related  to 
the  various  kinds  of  service  rendered  to  clients. 

145 

Prepare  a  chart  showing  the  organization  of  the  Foreign 
Department  of  a  bank. 

146 

Prepare  the  form  of  a  letter  to  be  used  by  a  local  bank 
in  notifying  its  foreign  correspondent  as  to  the  particu- 
lars concerning  drafts  drawn  by  the  former  on  the  latter. 

147 

Accompanying  Is  a  table  from  an  article  entitled  "  For- 
eign Exchange  and  Profitable  Investments  "  by  Mortimer 
B.  Lane  in  The  Street,  September  24,  1919. 

(a)  Make  the  necessary  changes  in  the  above  table  with 
sterling  exchange  at  3.80  instead  of  4.17. 

(6)  Explain  why  all  foreign  bonds  cannot  be  bought 
on  terms  to  realize  a  profit  in  foreign  exchange. 

148 
(a)  What  was  the  exact  provision  in  our  national  bank- 
ing law  previous  to  the  going  into  effect  of  the  Federal 


126      PROBLEMS  IN  FOREIGN  EXCHANGE 

Reserve  Act  that  prevented  national  banks  from  accept- 
ing drafts  based  on  the  importation  and  exportation  of 
merchandise  ? 

(&)  Precisely  how  has  the  situation  been  changed  by  the 
Federal  Reserve  Act  ? 

(c)  Prepare  a  statement  to  show  the  growth  of  Ameri- 
can foreign  banking  facilities  since  the  passage  of  the 
Federal  Reserve  Act. 

149 

In  referring  to  countries  upon  a  silver  standard,  W. 
F.  Spalding,  in  his  book,  Eastern  Exchange  Currency  and 
Finance,  states: 

Experience  has  shown  that  where  the  currency  is  depre- 
ciating as  compared  with  gold,  the  export  trade  and  business 
of  manufacturing  for  export  tend  to  increase.  That  is  said 
to  have  been  illustrated  in  the  case  of  the  British  and  Dutch 
colonies  during  the  period  of  rapid  depreciation  of  silver. 

Give  a  critical  analysis  of  the  reasons  advanced  in  sup- 
port of  this  point.  ~, 

150 

It  has  been  stated  that  irrespective  of  the  imports  and 
exports  of  European  countries,  exchange  rates  on  the 
United  States  cannot  return  to  par  until  Europe  has  re- 
sumed the  redemption  of  her  paper  money  in  gold  at  par. 

Criticize  the  reasoning  in  this  statement. 

151 

Below  is  an  advertisement  of  an  investment  house  deal- 
ing in  foreign  securities : 


GENERAL  PROBLEMS  127 

WE  OFFER,  SUBJECT  TO  PRIOR  SALE 

$50,000  Argentine  Govt.  Ss,  1945(a)66  and  ace.  interest 

£20,000  British  Govt.  Victory  4s@$32  per  £100 

£20,000  British  Govt.  War  Loans  5s,  1929-1947@$352  per 

£100 
Fes.  500,000  French  Govt.  4s,  1917@$57  per  1,000  Fes. 
Fes.  500,000  French  Govt.  5s,  1931@$72  per  1,000  Fes. 
$25,000  Japanese  Govt.  4s,  1931@$53  and  ace.  interest 
$20,000  Mexican  Government  48@28  flat 
$25,000  Mexican  Government  5s@34  flat 
$50,000  Mexican  Silver  3s@liy2flat 
$25,000  Russian  Govt.  Ext.  51/0(0)30  flat 
$25,000  Eussian  Govt.  6i/2S@31  flat 
50,000  Rubles  Russian  Govt.  Intl.  5y2S@34  flat. 

Determine  the  approximate  yield  of  each  of  the  above 
bonds  at  the  prices  quoted  on  June  13,  1920. 


PAET  III 
APPENDICES 


APPENDIX  A 
FOREIGN  EXCHANGE  DOCUMENTS  ^ 

1.  Acceptance  Agreement 

On  the  following  pages  is  shown  a  copy  of  an  "  acceptance  " 
agreement  which  is  used  in  connection  with  acceptance  credits 
granted  by  a  bank  for  the  purpose  of  financing  imports  or 
exports  to  or  from  the  United  States,  or  merchandise  stored  in 
warehouses  in  this  country  or  in  warehouses  in  other  countries, 
awaiting  shipment  to  the  United  States  or  another  country. 

This  form  of  agreement  is  signed  by  the  client  of  the  bank 
at  the  time  the  credit  is  arranged  for. 

1  The  forms  in  this  appendix  have  been  adapted  from  material 
furnished  by  courtesy  of  the  Guaranty  Trust  Company  of  New 
York.  The  name  of  a  fictitious  banking  institution,  the  Asso- 
ciated Trust  Company  of  New  York  has  been  used. 


131 


132      PEOBLEMS  IN  FOKEIGN  EXCHANGE 

ACCEPTANCE  AGREEMENT 

191 

For    and    in    consideration    of    the    acceptance    by    ASSOCIATED    TRUST 

COMPANY  OF  NEW  YORK,  of  my/our  draft  on  it  numbered 

dated payable 

for    

Dollars 

($ ),  and  all  other  drafts  which  may  hereafter  be  accepted  by  the 

Associated  Trust  Comiiany  of  New  York  al  my/our  request,  I/we  hereby  deposit 
with  and  assign  and  transfer  to  said  Trust  Company  as  collateral  security  for 
the  payment  ot  said  drafts  al  maturity,  as  well  as  for  the  payment  of  any  and 
every  debt  or  liability  of  every  nature  from  the  undersigned  to  said  Trust 
Company. 


with  such  additional  collaterals  as  may  from  time  to  time  be  required  by  any 
of  the  officers  of  said  Trust  Company,  and  which  the  undersigned  hereby 
promises  to  furnish  on  demand.  And  the  undersigned  hereby  gives  to  said 
Trust  Company,  or  its  assigns,  full  power  to  sell,  assign  and  deliver  the  whole 
or  any  part  of  said  collaterals,  or  any  substitutes  therefor,  or  any  additions 
thereto,  at  any  Brokers'  Exchange  or  elsewhere  at  public  or  private  sale,  at 
the  option  of  such  holder,  or  the  non  performance  of  any  of  the  promises 
herein  contained,  and  without  notice  of  amount  due  or  claimed  to  be  due, 
without  demand  of  payment,  without  advertisement  and  without  notice  of  the 
time  or  place  of  sale,  each  and  every  of  which  is  hereby  expressly  waived ; 
and  on  any  such  sale  the  Trust  Company,  its  assigns  or  any  of  the  officers  of  said 
Trust  Company,  may  purchase  on  its  own  account  and  without  further  ac- 
countability except  for  the  purchase  price  thereof,  the  whole  or  any  part  of 
the  property  sold  free  from  any  right  of  redemption  on  the  part  of  the  under- 
signed,  which   right  is  hereby   waived   and   released. 

It  is  further  agreed,  that  any  surjilus  arising  from  the  sale  of  said  col- 
laterals, be.voud  the  amount  due  hereon,  shall  be  applicable  upon  any  claim  of 
the  said  Trust  Company  arising  directly  or  by  assignment  against  the  under- 
signed at  the  time  of  said  sale,  whether  the  same  be  then  due  or  not  due. 

And  it  is  further  agreed  that  any  moneys  or  properties,  at  any  time,  in  the 
possession  of  ASSOCIATED  TRUST  COMi\4NY  OF  NEW  YORK,  belonging 
to  any  of  the  parties  liable  hereon  to  said  Trust  Company,  and  any  deposits, 
balance  of  deposits  or  other  sum  at  any  time  credited  by  or  due  from  said 
Trust  Company  to  any  of  said  parties,  shall  at  all  times  be  held  and  treated  as 
collateral  security  for  the  payment  of  any  other  obligation,  indebtedness  or 
liability  of  the  undersigned  to  the  said  Trust  Company,  whether  due  or  not 
due,  and  said  Trust  Company  may  at  any  time,  at  its  option,  set  off  the  amount 
due  or  to  become  due  hereon  or  any  other  obligations  against  any  claim  of  any 
of  said  parties  against  said  Trust  Company. 

And  I/we  also  agree  to  i>lace  said  Trust  Company  in  possession  of  sufficient 
funds  in  cash  previous  to  the  maturity  of  said  draft,  and  of  any  other  drafts 
which  the  said  Trust  Company  may  hereafter  from  time  to  time  accept  to  meet 
the  maturity  of  said  draft  or  drafts  respectively,  together  with  commissions  as 
agreed  and  any  interest  which  may  accrue  thereon,  calculated  at  the  rate  of 
six  per  cent  (6%)  per  annum.  Any  and  all  drafts  or  bills  of  exchange  now 
or  hereafter  delivered  by  me/us  to  said  Trust  Company  to  bo  collected  shall  be 
delivered  to  and  received  by  it  as  security  for  said  acceptance  or  acceptances 
without  impairing  in  any  way  my/our  obligation  hereunder  to  place  said  Trust 
Company  in  funds  before  the  maturity  of  said  acceptance  or  acceptances  as 
aforesaid,  and  all  documents  relating  to  such  bills  for  collection  shall  likewise 
be  held  and  received  by  said  Trust  Company  as  security  with  the  privilege  of 
delivering  same  to  drawees  upon  acceptance  or  acceptances  unless  instructions 
to  the  contrary  shall  be  attached  to  each  bill. 

The  said  Trust  Company  shall  have  the  right  to  apply  the  proceeds  of  such 
collections  against  the  payment  of  said  acceptance  or  acceptances  and  of  any 
Other  indebtedness  due  or  to  become  due  from  me/us. 


rOKEIGN  EXCHANGE  DOCUMENTS      las 

[feont] 

It  is  expressly  agreed  that  I/we  assume  all  responsibility  for  the  collection 
of  drafts  or  bills  delivered  as  aforesaid  and  for  any  loss,  costs  or  exijenses 
Buflfered  or  incurred  by  said  Trust  Conipiiuy  in  connection  therewith,  and  that 
said  Trust  Company  shall  be  held  free  of  responsibility  for,  and  my/our  obli- 
gation to  place  said  lYust  Company  in  funds  as  aforesaid  shall  not  be  affected 
or  impaired  by,  any  default,  neglect,  suspension,  insolvency  or  bankruptcy  of 
any  correspondent  or  sub-agent  to  whom  said  bills  or  drafts  m;ty  be  entrusted 
for  collection  or  for  any  delay  in  remittance,  loss  in  exchange,  or  the  loss  of 
the  said  drafts  or  bills  or  their  proceeds  during  transmission  or  in  the  course 
of  their  collection,  and  I/we  expressly  agree  to  assume  all  responsibility  for, 
and  that  my/our  said  obligation  to  said  Trust  Company  shall  not  be  affected  or 
impaired  by,  the  nou  payment  of  any  bills  of  exchange  which  may  be  received 
by  said  Trust  Company  or  by  any  collecting  bank,  agent  or  sub-agent  in  pay- 
ment of  such  drafts  or  bills  of  exchange. 

I/we  also  assume  all  responsibility  of,  and  said  obligation  to  place  said 
Trust  Company  in  funds  shall  not  be  affected  or  impaired  by,  any  risk  or  error 
in  the  course  of  transmission  of  telegrams  and  cablegrams  or  the  loss  of 
letters  or  other  documents  which  may  be  sent  in  connection  with  the  said 
drafts  or  bills  for  collection. 

1/we  also  agree  that  in  the  event  that  any  of  the  said  Trust  Company's 
correspondents,  agents  or  sub-agents  for  collection  of  said  drafts  or  bills  shall 
advise  it  that  any  of  said  drafts  or  bills  are  not  promptly  accepted  or  paid,  or 
in  Ihe  event  of  the  suspension,  failure  or  assignment  for  the  benefit  of  creditors, 
or  by  the  filing  of  a  petition  in  bankruptcy  against  the  drawee  or  the  drawees 
of  any  of  said  bills  for  collection,  that  I/we  will  immediately  upon  receipt  of 
such  notice,  waiving  protest,  and  notice  of  protest,  pay  or  cause  to  be  iiaid 
to  said  Trust  Company  in  cash  the  face  amount  of  any  such  draft  or  bill  for 
collection  which  has  not  been  accepted  or  the  drawee  of  which  has  suspended, 
failed  or  assigned  or  against  whom  a  petition  in  bankruptcy  has  been  filed  as 
aforesaid. 

In  the  event  of  my /our  suspension,  failure  or  assignment  for  the  benefit  of 
creditors,  or  of  a  petition  in  bankruptcy  being  filed  against  me/us.  or  the  non- 
fulfillment of  any  obligation  hereunder  on  my/our  part  to  be  performed,  all 
obligations  and  liabilities  to  said  Trust  Company  on  my/our  part  shall  imme- 
diately, without  notice,  accrue  and  mature  and  become  due  and  payable,  and 
it  is  also  agreed  that  in  either  of  those  events,  said  Trust  Company  may  take 
Buch  action  with  respect  to  the  collection  of  any  or  all  of  said  drafts  and  bills 
delivered  as  aforesaid  for  collection  as  it  may  deem  advisable  to  protect  its  in- 
terests, and  I/we  hereby  agree  to  indemnify  and  save  said  Trust  Company 
harmless  from  any  loss,  costs,  damage,  expense  (including  reasonable  attor- 
neys' fees),  suffered  or  incurred  by  it  by  reason  of  such  action  or  by  reason 
of  my/our  failure  to  perform   any  of  the   obligations   arising   hereunder. 

This  obligation  shall  continue  in  force  and  remain  applicable  notwithstanding 
any  change  in  the  individuals  comprising  our  firm,  whether  such  change  shall 
arise  from  the  accession  of  one  or  more  new  partners  or  from  the  death,  retire- 
ment or  succession  of  any  partner  or  partners. 

All  rights  arising  under  this  agreement  shall  be  determined  according  to  the 
laws  of  the  State  of  New  York. 

19 

WHEREAS 

the  undersigned  has/have  requested  the  AssociATEn  Trust  Company  of  New 
York  to  accept  the  drafts  mentioned  and  described  in  the  acceptance  agreement 

of dated   the day   of 19.  ., 

printed  on  the  reverse  side  hereof,  and 

WHEREAS,  the  said  Associated  Teust  Company  of  New  York  is  willing 
to  execute  such  acceptances  provided  the  undersigned  will  unconditionally 
guarantee  to  it  the  prompt  payment  at  maturity  of  the  said  drafts  and  of  any 

other  drafts   of 

which  the  said  Trust  Company  may  hereafter  accept  from  time  to  time. 

NOW,  IN  CONSIDERATION  OP  THE  PREMISES  and  of  the  sum  of  One 
Dollar  to  the  undersigned  in  hand  paid,  the  receipt  whereof  is  hereby  acknowl- 
edged,   the  undersigned  do hereby   unconditionally   guarantee  to   the 

said  Associated  Trust  Company  of  Nbw  York,  its  successors,  endorsees  and 
assigns,  the  prompt  p.ayment  at  maturity  of  any  and  all  drafts  accepted  by  the 
Associated  Tri^st  Company  of  Nkw  York,  pursuant  to  said  acceptance 
agreement,    and    any    and    all    renewals    and    extensions    thereof,    the    prompt 


134      PEOBLEMS  IN  FOREIGN  EXCHANGE 

t  FRONT — CONTINUED ] 

performance  by of   all 

the  terms,  conditions  and  covenants  contained  in  said  acceptance  agreement, 
and  the  payment  of  every  debt  and  liability  of 

to  the 

Associated  Trust  Companv  of  New  York. 

The  undersigned  hereby  consents  to  any  renewal  and  extension  of  time  of 
payment  of  any  draft,  drafts  or  other  indebtedness  that  may  be  granted  by  the 

Associated  Teust  Company  of   New   York,   and  do also  consent  that 

the  securities  set  forth  in  said  acceptance  agreement  may  be  exchanged  or  sur- 
rendered from  time  to  time  without  notice  to,  or  further  assent  from  the 
undersigned,  and  that  the  undersigned  will  remain  bound  upon  this  guarantee 
notwithstanding  such  changes,   surrenders,   renewals  and  extensions. 

The  undersigned  expressly  waives  presentment,  demand  of  payment,  protest 
and  notice  of  dishonor  of  said   drafts   and   acceptances  thereof,   and  does   also 

waive  notice  of  the  nonperformance  on  the  part  of 

of  any  of  the  provisions  or  covenants  of  the  aforesaid  acceptance  agreement  on 
his/its/their  part  to  be  performed  and  notice  of  any  sale  of  the  collateral 
securities  aforesaid. 

This  guarantee  is  made  without  any  limitation  as  to  duration  or  amount, 
and  the  undersigned  agree.  .  .  .that  it  shall  continue  and  that  the  said  Asso- 
ciated Trust  Company  op  New  York  may  continue  to  act  on  the  faith 
thereof  to  any  extent  until  such  time  as  the  said  Trust  Company  shall  receive 
from  me/us  written  notice  of  its  withdrawal ;  which  notice,  however,  shall  not 
in  any  wise  aflfect  any  draft  and  acceptance  theretofore  made  or  any  other 
liability  theretofore  incurred,  whether  then  due  and  payable  or  thereafter  to 
become  due  and  payable,  and  not  fully  paid  at  the  time  of  the  receipt  by  the 
said  Trust  Company  of  said  notice. 

The  undersigned  declares  to  and  covenants  with  the  said  Associated  Trust 
Company  of  New  York,  its  successors,  endorsees  and  assigns,  that  the  under- 
signed ha.  .  .  .no  defense  whatever  to  any  action,  suit  or  proceeding  at  law,  or 
otherwise,  that  may  be  instituted  upon  this  guarantee. 

This  guarantee  shall  be  construed  in  accordance  with  the  laws  of  the  State 
of  New  York. 

IN    WITNESS   WHEREOF,    the    undersigned    ha set  his/our    hand 

and  seal. . .  .this day  of 19. . .  . 

[L.S.] 

[back] 

2.  Consular  Invoice 
The  following  is  a  specimen  of  a  consular  invoice  as  used 
to  cover  a  shipment  of  merchandise  from  the  United  States 
to  Cuba.  The  form  of  consular  invoice  as  used  by  the  dif- 
ferent countries  varies,  each  country  having  its  own  form. 
The  regulations  in  connection  with  the  preparation  of  such 
invoices  are  generally  very  strictly  enforced,  therefore  great 
care  should  be  exercised  in  preparing  them. 


FOREIGiT  EXCHANGE  DOCUMENTS      135 


CONSULAR  INVOICE 


New  York 19 

FAOTURA   de   mercwncias   embarcadae   por. 


(Consignor) 

a  bordo  de con  destino  a 

(Name  of  Vessel)  (Port) 

por  cuenta  y  riesgo  de 

(or  who's  account  and  risk  shipment  is  made) 

y  d  la  conaignacion  de 

(Consignee) 


MARCAS 

(Marks) 

NUMEROS 

(Numbers) 

NUMERO 
DE  BULTOS 

(Number  of 
Packages) 

DESCRIPCION 

(Description) 

( Detailed 

Contents 

Component 

Materials) 

Peso  Bruto 
Gross  Wgt. 

KILOS 

Peso  Neto 
Net  Wgt. 

KILOS 

PRECIO 

Price 

VALOR 

Value 

Declare  que  eoy  el de  las  mercancias  relacionadas  en  la 

presente  factura  y  que  son  ciertos  los  precios  y  demaa  particulares  que  en  ella 
Be  consignan,  *y  que  las  mercancias  contenidas  en  dicha  factura  son  productos 
del  Buelo  6  de  la  industria  de  los  Estados  Unidos  de  America. 

*If  merchandise  shipped  is  from  any  country,  other  than  the  Unit-ed  States, 
remainder  of  above  declaration  should  be  cancelled. 

Declaro  que  soy  el  Agente  autorizado  por  Don .que  ha 

suscrito  la  anterior  deciaraci6n,  para  presentar  esta  factura  en  la  Oficina  Con- 
salsr  de  Cuba  en  esta  plaza,  4  fin  de  que  sea  certificada. 


136      PROBLEMS  IN  FOREIGN  EXCHANGE 


3.  Bills  of  Lading 

(Abbreviation  B/L;  plural  B8/L) 

An  ocean  bill  of  lading  is  the  most  important  of  the  shipper's 
papers.  It  is  customarily  drawn  up  by  the  Khipper  on  forms  which 
the  carrier  supplies,  and  which  arc  sifined  by  the  latter  after 
delivery  of  the  dock  receipt  and  the  shipper's  manifest.  Besides 
being  the  final  receipt  from  the  carrier,  the  ocean  bill  of  lading 
constitutes  a  shipping  contract  between  the  carrier  and  shipper. 
It  becomes  a  negotiable  document,  and  may  be  used  by  the  shipper 
as  the  basis  for  a  draft  if  it  is  drawn  to  his  order.  It  is  not 
the  usual  practice,  however,  for  the  ocean  bill  of  lading  to  be 
drawn  in  the  consignee's  name  unless  he  has  a  special  agreement 
with  the  shipper,  or  unless  advance  payment  has  been  made  or 
security  arranged  before  shipment.  The  basis  of  financial  settle- 
ment most  commonly  employed  .n  foreign  trade  is  by  drafts,  or  bills 
of  exchange,  to  which  have  been  attached  a  shipper's  invoice,  insur- 
ance policy,  and  ocean  I)ill  of  lading.  The  number  of  copies  of  the 
bill  of  lading  required,  vary  according  to  the  nature  of  the  transac- 
tion. Banks,  if  settlement  is  to  be  made  by  draft,  will  require  two 
or  more  negotiable  copies  and  the  possession  of  all  the  negotiable 
copies.  Non-negotiable  copies  will  also  be  needed  by  the  shipper,  the 
carrier,  and  the  consignee  for  filing,  and  by  foreign  consuls  to  meet 
the  provisions  of  the  law. 

An  e.xport  bill  of  lading  is  used  in  cases  where  the  exporter  at  an 
inland  point  wishes  to  bill  his  goods  from  point  of  shipment  to 
foreign  point  of  receipt,  port  or  interior.  By  obtaining  a  through 
bill  of  lading  from  a  railroad  the  exporter  obviates  the  necessity  of 
securing  a  railway  bill  of  lading  to  the  export  port,  and  then  an 
ocean  bill  of  lading  to  the  foreign  port  of  receipt.  The  export  bill 
of  lading  constitutes  a  triple  contract,  covering:  (1)  Shipment  by 
rail  or  water  to  port  of  export;  (2)  Shipment  by  sea;  (3)  Ship- 
ment from  foreign  port  of  entry  to  inland  destination. 

A  parcel  receipt  is  issued  by  ocean  carriers  to  expedite  the  trans- 
portation of  small  packages,  most  commonly  samples,  although 
general  merchandise  is  so  shipped  on  occasions.  The  value,  weight, 
and  dimensions  of  the  goods  carried  are  restricted.  Parcel  ship- 
ments are  designed  to  avoid  the  high  rates  that  would  have  to  be 
paid  for  small  lots  of  goods  under  the  minimum  freight  charge  usu- 
ally stipulated  in  ocean  bills  of  lading,  under  which  nothing  less 
than  a  ton  rate  or  a  specified  amount  would  be  accepted,  no  matter 
how  small  the  consignment.  Numerous  shipping  lines  are  now 
using  these  receipts. 

The  matter  of  bills  of  lading  is  so  complex  and  includes  such  a 
multitude  of  conditions  governing  the  shipment  of  merchandise  that 
it  is  impracticable  here  to  reproduce  the  numerous  forms  that  are 
in  use  by  the  shipping  companies  or  to  discuss  the  whole  subject  in 
detail.  Ocean  bills  of  lading  are  not  uniform  like  railroad  bills  of 
lading.     Each  steamship  company  has  its  own  form  and  conditions 


FOREIGN  EXCHANGE  DOCUMENTS      137 

according  to  the  countries  between  which  its  steamers  run.  Entirely 
different  bills  of  lading,  for  instance,  are  used  for  shipments  to 
South  America  and  for  those  destined  to  France  or  England,  although 
both  bills  of  lading  may  bo  issued  by  the  same  steamship  company. 


138      PROBLEMS  1^  FOREIGN  EXCHANGE 

4.  Import  Letter  of  Credit 

Specimen  of  a  Dollar  import  letter  of  credit  covering  a 
shipment  of  raw  silk  from  Japan  is  shown  on  the  following 
page.  These  letters  of  credit  can  be  issued  for  the  impor- 
tation of  any  commodity,  and  are  accepted  readily  by  foreign 
merchants  in  any  part  of  the  world  as  they  know  that  as 
soon  as  the  merchandise  has  been  shipped,  they  can  obtain 
reimbursement  through  their  own  local  banks  by  presenting 
the  credit  along  with  the  documents  stipulated. 

The  details  of  a  letter  of  credit  are  matters  for  arrange- 
ment between  the  American  importer  and  the  foreign  shipper. 
Letters  of  credit  can,  when  necessary,  be  established  by  cable, 
saving  the  delay  in  waiting  for  their  transmission  by  mail. 


FOREIGN  EXCHANGE  DOCUMENTS      139 


IMPORT  LETTER  OF  CREDIT   (DOLLARS) 


Credit   No.    134567  Associated  Trust  Company  op  New  Yoek 

Foreign  Department 
9100,000— U.S. C. 

New  York     J''<'^ruaTU   11,   1919 
Messrs.  John  Doe  &  Company, 


Yokohama,  Japan 


Dear  Sirs: 

At  the  requeBt  and  for  the  account  of  l^csKrs.  Johnson  Crawl  or  d  &  Company, 

New  York -^fi^  hereby  authorize  you  to  value  on 

Associated  Trust  Companv  of  New  York,  New  York 
nt          Tnvr  (4)  Months'  M'lht         f^y  the  sum  or  sums  not  exceeding  a  total  of 
One  hundred  thousand  dollars   ($100,000) 

accompanied  by   commercial  invoice,    consular   invoice,    bills   of  ladincf    Marxne 
and  war-risk,  insurance  certifiratps 

representing        <'"**■   insurance    and    freiuht        shipment   of         ^""^    ■^'7^'    from. 
Yokohama,  Japgin,  to   AVic   York 

Insurance  Marine  and  war-risk  insurance  to  be  effected  bu  the  shippers 

Bills  of  lading  for  such  shipments  must  be  drawn  to  the  order  of  ^f''n'''of''d 

Trust  Company  of  New   York,  New  York 

A  copy  or  THE  consular  i>rvoicE  AND  one  bill  op  lading  must  be  sent 

BY    THE    BANK    NEGOTIATING    DRAFTS,    DIRECT    TO    ASSOCIATED    TRUST    COMPANY 
OF    NEW    YORK,    NEW    YORK. 

The  amount  of  each  draft  negotiated  must  be  endorsed  hereon. 

We  hereby  agree  with  bona  fide  holders  that  all  drafts  drawn  by  virtue  of  this 
Credit,  and  in  accordance  with  the  above  stipulated  terms,  shall  meet  with  due 
honor  upon  presentation  at  the  Associated  Trust  Company  of  New  York,  New 

York,  if  drawn  and  negotiated  prior  to  ^^""  ^^    1919 ^ 

Associated  Trust  Company  of  New  York 


N.  B.     Drafts  drawn  under  this 
Credit     must     bear     the 
clause      "  drawn      under 
Letter  of  Credit 
jjo    134567      Dat^»(^    February  11,  1919" 

ORIGINAL  — ISSUED  IN  DUPLICATE 


140     PROBLEMS  IN  FOREIGN  EXCHANGE 

5.  Dollar  Import  Letter  of  Credit  Agreement 

New  York, 19. 

To  THE 

ASSOCIATED  TRUST  COMPANY  OF  NEW  YORK 
Gentlemen  : 
Having  received  from  you  the  Letter  of  Credit  on. 


account  of  which  a  true  copy  is  on  the  other  side,  I/we  hereby  agree 
to  its  terms,  and  in  consideration  thereof  I/we  agree  with  you  to 
provide  in  New  York,  day  previous  to  the  Maturity  of  the  Bills 
drawn  in  virtue  thereof,  sufficient  funds  in  cash,  to  meet  the  pay- 
ment of  the  same  with per  cent  commission,  and  I/we  un- 
dertake to  insure  at  my /our  expense,  for  your  benefit,  against  risk  of 
Fire  or  Sea,  all  property  purchased  or  shipped  pursuant  to  said 
Letter  of  Credit,  in  Companies  satisfactory  to  you. 

I/we  agree  that  the  title  to  all  property  which  shall  be  purchased 
or  shipped  under  the  said  credit,  the  bills  of  lading  thereof,  the  poli- 
cies of  insurance  thereon  and  the  whole  of  the  proceeds  thereof,  shall 
be  and  remain  in  you  until  the  payment  of  the  bills  referred  to  and 
of  all  sums  that  may  be  due  or  that  may  become  due  on  said  bills 
or  otherwise,  and  until  the  payment  of  any  and  all  other  indebted- 
ness and  liability  now  existing  or  now  or  hereafter  created  or 
incurred  by  me/us  to  you  on  any  and  all  other  transactions  now  or 
hereafter  had  with  you,  with  authority  to  take  possession  of  the 
same  and  to  dispose  thereof  at  your  discretion  for  your  reimburse- 
ment as  aforesaid,  at  public  or  private  sale,  without  demand  or 
notice,  and  to  charge  all  expenses,  including  commission  for  sale 
and  guarantee. 

Should  the  market  value  of  said  merchandise  in  New  York,  either 
before  or  after  its  arrival,  fall  so  that  the  net  proceeds  thereof  (all 
expenses,  freight  duties,  etc.,  being  deducted)  would  be  sufficient  to 
cover  your  advances  there  against  with  commission  and  interest, 

I/we  further  agree  to  give  you  on  demand  any  further  security  you 
may  require,  and  in  default  thereof  you  shall  be  entitled  to  sell 
said  merchandise  forthwith,  or  to  sell  "  to  arrive,"  irrespective  of 
the  maturity  of  the  acceptances  under  this  Credit.  1/we  being  held 
responsible  to  you  for  any  deficit,  which  I/we  bind  and  oblige 
myself/ourselves  to  pay  you  in  cash  on  demand. 

In  case  I/we  should  hereafter  desire  to  have  this  credit  confirmed, 
altered  or  extended  by  cable  (which  will  be  at  my /our  expense  and 
risk),  I/we  hereby  agree  to  hold  you  harmless  and  free  from  respon- 
sibility from  errors  in  cabling,  whether  on  the  part  of  yourselves  or 
your  Agents,  here  or  elsewhere,  or  on  the  part  of  the  cable  companies. 

This  obligation  is  to  continue  in  force,  and  to  be  applicable  to  all 
transactions,  notwithstanding  any  change  in  the  composition  of  the 
firm  or  firms,  parties  to  this  contract  or  in  the  use  of  this  credit, 
whether  such  change  shall  arise  from  the  accession  of  one  or  more 
new  partners,  or  from  the  death  or  secession  of  any  partner  or 
partners. 

It  is  understood  and  agreed  that  if  the  documents  representing  the 
property  for  which  the  said  Credit  has  been  issued  are  surrendered 
under  a  trust  receipt,  collateral  security  satisfactory  to  the  Trust 


FOREIGN  EXCHANGE  DOCUMENTS      141 

Company,  such  as  stocks,  bonds,  warehouse  receipts,  or  other  secu- 
rity shall  be  given  to  the  Trust  Company,  to  be  held  until  the  terms 
of  the  credit  have  been  fully  satisfied  and  subject  in  every  respect 
to  the  conditions  of  this  agreement. 

It  is  further  understood  and  agreed  in  the  event  of  any  suspension, 
or  failure,  or  absigument  for  the  benefit  of  creditors  on  my/our  part, 
or  of  the  nonpayment  at  maturity  of  any  acceptance  made  by  me/us, 
or  of  the  nonfulfillment  of  any  obligation  under  said  credit  or  under 
any  other  credit  issued  by  The  Associated  Trust  Company  of  New 
York  on  my/our  account,  or  of  any  indebtedness  or  liability  on 
my/our  part  to  you,  all  obligations,  acceptances,  indebtedness  and 
liabilities  whatsoever  shall  thereupon,  at  your  option  then  or  there- 
after exercised,  without  notice,  mature  and  become  due  and  payable. 

It  is  understood  and  agreed  that  you  shall  not  be  held  responsible 
for  the  correctness  or  validity  of  the  documents  representing  ship- 
ment or  shipments,  nor  for  the  description,  quantities,  quality  or 
value  of  the  merchandise  declared  therein. 


142      PROBLEMS  IN  FOREIGN  EXCHANGE 

6.  Import  Letter  of  Credit  (Pounds  Sterling) 

Credit  No._i££££Z£,  Associated  Trust  Company  or  New  Yoek 

Foreign  Department 
£.200,000 

New  York     February  11,  1919 
Jleasrg.  Chaa.  8.  Goodwin  *  Co., 

Colombo,  Ceylon. 

Dear  Sirs: 

At  the  request  and  for  the  account  of  Messrs.  Ckarleg  S.  Wheatherby  *  Co., 

Inc.,  New  Tori ^g  hereby  authorize  you  to  value  on 

Associated  Trust  Company  or  New  York,  32  Lombard  St.,  London 

at       Four   (4)  months  sight       {^^  g^y  ^^^  ^^  g^^js  jjoj  exceeding  a  total  of 

Two  hundred  thousand  pounds  Sterling   (£200,000) 


accompanied  by  commercial  invoice,   consular  invoice,  bills  of  lading. 


ranresenting   75%  cost  f.o.b.  Hhinment,  of   Crude   Rubber  from  Colombo,  Ceylon 
to   United  States  Atlantic  Port  

Insurance Marine  and  woA'-risk  insurance  effected  in  New  York 

Bills  of  lading  for  such  shipments  must  be  drawn  to  the  order  of  ■'° 
Order  "    and    endorsed   in    blank 

A  COPY  or  THE  consular  INVOICE  AND  ONE  BILL  OF  LADING  MUST  BE  SENT 
BY  THE  BANK  NEGOTIATING  DRAFTS.  DIRECT  TO  ASSOCIATED  TRUST  COMPANY 
OF  NEW   YORK,   NEW  YORK. 

The  amount  of  each  draft  negotiated  must  be  endorsed  hereon. 

"We  hereby  agree  with  bona  fide  holders  that  all  drafts  drawn  by  virtue  of 
this  Credit,  and  in  accordance  with  the  above  stipulated  terms,  shall  meet  with 
due  honor  upon  presentation   at  the  Associated  Trust  Company  of  New  York, 

London,  if  drawn  and  negotiated  prior  to  ■^"■^  ^J-  ^^^^- 

Associated  Trust  Company  of  New  York 

N.  B.  Drafts  drawn  under  this 
Credit     must    bear    the 
clause     "  drawn     under 
Letter  of  Credit 
No.  J345678     Dated  February  11,  1919" _ 


ORIGINAL  — ISSUED  IN  DUPLICATE 


FOREIGN  EXCHANGE  DOCUMENTS      143 

7.  Sterling  Import  Letter  of  Credit  Agreement 

tiew  York, 19 


To  the 

ASSOCIATED  TRUST  COMPANY  OF  NEW  YORK 

Oentlemen : 

Letter  of  Credit  having  been  issued  at  my/our  request,  of  which  a 
true  copy  is  on  the  other  side,  I  lice  hereby  agree  to  its  terms,  and  in 
consideration  thereof  I/ice  agree  with  you  to  provide  in  New  York, 
at  such  time  previous  to  the  Maturity  of  the  Bills  draun  in  virtue 
thereof  as  may  he  decided  by  you  sufficient  funds  in  cash,  or  in  Bills 
on  London,  satisfactory  to  you,  at  not  exceeding  sixty  days'  sight, 

and  endorsed  by  me/us,  to  meet  the  payment  of  the  same  with 

per  cent  commission  and  interest  as  hereinafter  provided,  and  I/we 
undertake  to  insure  at  my/our  expense,  for  your  benefit,  against  risk 
of  Fire  or  Sea,  all  property  purchased  or  shipped  pursuant  to  said 
Letter  of  Credit,  in  Companies  satisfactory  to  you. 

I/we  agree  that  the  title  to  all  property  which  shall  be  purchased 
or  shipped  under  the  said  credit,  the  bills  of  lading  thereof,  the 
policies  of  insurance  thereon  and  the  whole  of  the  proceeds  thereof, 
shall  he  and  remain  in  you  jintil  the  payment  of  the  bills  referred  to 
and  of  all  sums  that  may  be  due  or  that  may  become  due  on  said  bills 
or  otherwise,  and  until  the  payment  of  any  and  all  other  indebtedness 
and  liability  now  existing  or  now  or  hereafter  created  or  incurred 
by  me/us  to  you  on  any  and  all  other  transactions  now  or  hereafter 
had  loith  you,  with  authority  to  take  possession  of  the  same  and  to 
dispose  thereof  at  your  discretion  for  your  reimbursement  as  afore- 
said, at  public  or  private  sale,  without  demand  or  notice,  and  to 
charge  all  expenses,  including  commission  for  sale  and  guarantee. 

Should  the  market  value  of  said  merchandise  in  New  York,  either 
before  or  after  its  arrival,  fall  so  that  the  net  proceeds  thereof  {ali 
expenses,  freight,  duties,  etc.,  being  deducted)  would  be  insufficient 
to  cover  your  advances  thereagainst  tcith  commission  and  interest 


144     PROBLEMS  IN  FOREIGN  EXCHANGE 

I/we  further  agree  to  give  you  on  demand  any  further  security  you 
may  require,  and  in  default  thereof  you  shall  be  entitled  to  sell  said 
merchandise  forthunth,  or  to  sell  "  to  arrive "  i/rrespective  of  the 
m,aturity  of  the  acceptances  under  this  Credit,  I/we  being  held  re- 
sponsible to  you  for  any  deficit,  which  I/we  bind  and  oblige  my- 
self/ourselves to  pay  you  in  cash  on  demand. 

It  is  understood  that  in  all  payments  made  by  me/us  to  you  in 
the  United  States,  the  Pound  Sterling  shall  be  calculated  at  the 
current  rate  of  exchange  for  Bankers'  Bills  in  New  York  on  London 
existing  at  the  time  of  settlement,  and  that  interest,  if  any,  shall  be 
charged  at  the  rate  for  overdrafts  current  in  London,  at  the  time  of 
settlement. 

Should  I/we  anticipate  the  payment  of  any  portion  of  the  amount 
payable,  interest  is  to  be  allowed  at  a  rate  to  be  fixed  by  the  Asso- 
ciated Tru^t  Company  of  New  York. 

In  case  I/we  should  hereafter  desire  to  have  this  credit  confirmed, 
altered  or  extended  by  cable  {which  will  be  at  my /our  expense  and 
risk),  I /we  here  agree  to  hold  you  harmless  and  free  from  responsi- 
bility from  errors  in  cabling,  whether  on  the  part  of  yourselves  or 
your  Agents,  here  or  elsewhere,  or  on  the  part  of  the  cable  companies. 

This  obligation  is  to  continue  in  force,  and  to  be  applicable  to  all 
transactions,  notwithstanding  any  change  in  the  composition  of  the 
firm  or  firms,  parties  to  this  contract  or  in  the  user  of  this  credit, 
whether  such  change  shall  arise  from  the  accession  of  one  or  more 
new  partners,  or  from  the  death  or  secession  of  any  partner  or 
partners. 

It  is  understood  and  agreed  that  if  the  documents  representing 
the  property  for  which  the  said  Credit  has  been  issued  are  surren- 
dered under  a  trust  receipt,  collateral  security  satisfactory  to  the 
Company,  such  as  stocks,  bonds,  warehouse  receipts  or  other  secur- 
ity, shall  be  given  to  the  Company,  to  be  held  until  the  terms  of  the 
credit  ha/ve  been  fully  satisfied  and  subject  in  every  respect  to  the 
conditions  of  this  agreement. 

It  is  further  understood  and  agreed  in  the  event  of  any  suspension, 
or  failure-f  or  assignment  for  the  benefit  of  creditors  on  my /our  part. 


FOREIGN  EXCHANGE  DOCUMENTS     145 

or  of  the  nonpayment  at  maturity  of  any  acceptance  made  by  me/us, 
or  of  the  nonfulfillment  of  any  obligation  under  said  credit  or  under 
any  other  credit  issued  by  the  Associated  Trust  Company  of  New 
York  on  my/our  account,  or  of  any  indebtedness  or  liability  on 
my/our  part  to  you,  all  obligations,  acceptances,  indebtedness  and 
liabilities  whatsoever  shall  thereupon,  at  your  option  then  or  there- 
after exercised,  without  notice,  multure  and  become  due  and  payable. 
It  is  understood  and  agreed  that  you  shall  not  be  held  responsible 
for  the  correctness  or  validity  of  the  documents  representing  ship- 
ment or  shipments,  nor  for  the  description,  qua/ntitiet  or  quality  of 
the  merchandise  declared  therein. 


Kindly  execute  above  form  and  return  to  Associated  Trust  Company. 


146     PKOBLEMS  IN  FOREIGN  EXCHANGE 

8.  Revocable  Export  Credit 

On  the  next  page  is  shown  a  form  of  an  export  credit, 
opened  by  a  foreign  buyer  through  the  Associated  Trust 
Company  of  New  York,  in  favor  of  a  manufacturer  ex- 
porter, or  shipper  in  the  United  States. 

The  specimen  shown  is  a  revocable  credit,  which  means  that 
although  a  date  of  expiration  is  placed  on  the  credit,  it  is, 
nevertheless,  subject  to  cancellation  at  any  time. 


FOREIGN  EXCHANGE  DOCUMENTS      147 

ASSOCIATED  TEUST  COMPANY  OP  NEW  YORK 

New  York  February  99,  101$ 
Please  address  reply  to 
Associated  Trust  Company  of  New  York  „^„^„„  ^T^mT^rm 

Foreign   Department  EXPORT  CREDIT 


No. 


Ex—eoooi 


tp       The   United  States   M^rcarUiU   Co., 

140  Broadway, 

New  York  City 

Dear  Sir: 

In  accordance  with        '•"ft'"       instructions  received  frnm        Barwo  Ifercanfil 

Americano    de    Colombia,    Bogota 

we  open  a  revocable  credit  in  your  favor  for  account  of    T^g  South  Amervcan 

Import   Company,  Bogota,   Colombia 

Amount    $   50,000.00         {Fifty  thousand Dollars) 

covering  shipment  of  coffee  cleaning  machinery  from  New  York  to  Barranquilla, 

Colombia 


Drafts  under  this  Letter  of  Credit  are  to  be  drawn  at sight  on — ^ — 

and  are  to  be  accompanied  by  a  set  ol  Shipping  Documents 


of  a  character  which  must  meet  with  our  approval,  consisting  of: 


Shipper's  Invoices . -— — 

Consular    invoices    if    such    documents    are    required    in    connection    with    this 

shipment. 

Marine  and  War  Risk  insurance  policies       _ 

Full  set  of  ocean  steamer  Bills  of  Lading  »''^^^  »»t  <"  '"•^"^  '^"'^  endorsed  in 

blank,  or  to  the  order  of  the  Banco  MercantU  Americano  de  Colombia 


This  Letter  of  Credit  Is  Valid  only  upon  there  having  been  issued  an  appropriate  Export 
License,  covering  tlie   transactlun.  j    ■   .v. 

It  must  be  understouii  that  payments  under  this  Credit  will  only  be  made  provided  the 
goods  are  actually  on  board  or  loading  on  the  Vessel  named  in  the  B/L. 

If  Government  regulations  restrict  the  issue  of  order  Kills  of  Lading,  please  communicate 
with  us  and  we  will  advise  you  in  the  premises. 

Marine  insurance  sliould  cover  from  Warehouse  to  Warehouse,  and  not  less  than  ten  days 
after  arrival,  and  also  include  deviation  clause,  craft  and  lighter  clause,  negligence  and/or 
latent  defect  clause.  Policies  reading  Free  ol  Particular  Averaye  completely,  must  not  be 
tendered  without  prior  arrangement  with  us. 

This  Letter  of  Credit  Is  issued  subject  to  all  regulations  and  enactments  of  the  United 
States  Uovernment  and  its  Allies  and  to  any  proclamations  of  the  President  governing  export 
shipments. 

The  documents  should  be  presented  ichenever  po««i6I«  In  time  to  be  forwarded  on  the 
steamer  carrying  the  merchandise. 

This  Letter  of  Credit  expirpw       ■^Mnc  30,  1919       unless  sooner  revoked. 
If  you  are  unable  to  comply  with  the  terms  as  indicated  above,  please  com- 
municate with  us  promptly,  and  oblige, 

Yours  respectfully, 

Associated  Tbdst  Company  or  Nkw  Yoke 


148      PROBLEMS  IN  FOREIGN  EXCHANGE 


9.  Irrevocable  Export  Credit 

On  the  next  page  is  shown  a  specimen  of  an  irrevocable  ex- 
port credit  opened  by  a  foreign  buyer  in  favor  of  a  firm  of 
exporters  in  the  United  States. 

This  credit  differs  from  the  revocable  export  credit,  shown 
on  the  preceding  page,  in  that,  as  an  irrevocable  credit,  it 
cannot  be  cancelled  prior  to  the  date  specified  in  the  credit, 
without  the  consent  of  the  party  in  whose  favor  it  is  issued. 


FOREIGN  EXCHANGE  DOCUMENTS      149 

ASSOCIATED  TRUST  COMPANY  OF  NEW  YORK 

New  York  Febrwi/ry  26,  1919 


Please  address  reply  to 

Associated  Trust  Company  of  New  York 

Forei^  Department 

To      The   American   Export   Association, 

140  Broadway, 

New  York  Oity 


EXPORT  CREDIT 


No.  G-eoooo 


Dear  Sir: 

In  accordance  with__££5[?__  instructions  received  from       Banco  UercantC 
Americano  del  Peru,  Lima,  Peru 

we  open  an  irrevocable  credit  in  your  favor  for  account  of    The  South  American 

Import   Company,  Lima,   Peru 

Amount  ^    100,000.00      (One   hundred   thousand Dollars) 

covering  shipment  of  seneral  merchandise  from  New  York  to  Cailao,  Pern 

Drafts  under  this  Letter  of  Credit  are  to  be  drawn  at^ sight  on     "* 

and  are  to  be  accompanied  by  a  set  of  Shipping  Documents 


of  a  character  which  must  meet  with  our  approval,  consisting  of: 
Ship{>er's  invoices 


Consular    invoices    if    such    documents    are    required    ia    connection    with    this 
shipment. 

Marine  and  War  Risk  insurance  policies 

PnU  set  of  ocean  steamer  Bills  of  Lading  made  out  to  order  and  endorsed  in 
blank,  or  to  the  order  of  the  Banco  MercantU  Americano  del  Peru 


This  lietter  of  Credit  Is  Valid  only  udod  tbere  bavinE  been  Issued  an  aitpropriate  Export 
lilcense,  cuvering  tbe  transaction. 

It  must  be  understood  that  payments  under  this  Credit  will  only  be  made  provided  the 
(ucjds  are  actually  on  board  or  loading  on  tbe  Vessel  named  in  the  U/L. 

II  (iovernment  regulatluni  restrict  tbe  issue  ot  order  Bills  of  Lading,  please  communicate 
with  us  and  we  will  advise  you  in  the  premises. 

Marine  insurance  should  cover  from  Warehouse  to  Warehouse,  and  nut  less  than  ten  days 
after  arrival,  and  also  include  deviation  clause,  craft  and  lighter  clause,  negligence  and/or 
latent  detect  clause,  folicies  reading  Free  of  Particular  Average  completely,  must  nut  be 
tendered  without  prior  arrangement  with  us. 

This  Letter  of  Credit  is  issued  subject  to  all  regulations  and  enactments  of  the  United 
States  Uovernment  and  its  Allies  and  to  any  proclamations  of  the  President  governing  export 
■uipments. 

The  documents  should  be  presented  ickeneter  posiible  In  time  to  be  forwarded  on  tbe 
steamer  carrying  Uie  merchandise. 

This  Letter  of  Credit  expires         /'^nr  30.  1919. 

If  you  are  unable  to  comply  with  tbe  terms  as  indicated  above,  please  com- 
municate with  us  promptly,  and  oblige, 

Yours  respectfully, 

AssocL&TED  TbiVST  Oompant  01*  Nbw  Yobk 


150      PROBLEMS  IN  FOREIGN  EXCHANGE 

10.  Trust  Receipts 

Trust  receipts  are  sometimes  accepted  as  temporary  col- 
lateral from  responsible  customers,  in  exchange  for  shipping 
documents  or  warehouse  receipts.  They  are  also  used  in  con- 
nection with  import  and  export  letters  of  credit  and  loans. 
Several  forms  are  given  below. 


FOREIGN  EXCHANGE  DOCUMENTS      151 

TRUST  RECEIPT 


Received  from  The  Associated  Tbust  Ct).  of  New  Yobk  the  fol- 
lowing goods  and  merchandise,  their  property,  specified  in  the  Bill 

of  Lading  per  S.S 

Dated marked  and  numbered  as  follows : 


and,  in  consideration  thereof,  I/we  hereby  agree  to  hold  said  goods 
IN  TRUST  for  them,  and  as  their  property,  with  liberty  to  sell  the 
same  for  their  account,  and  further  agree,  in  case  of  sale,  to  hand 
the  proceeds  to  them  to  apply  against  the  acceptances  of  The  Asso- 
ciated Trust  Co.  of  New  York  on  my /our  account,  under  the  terms 

of  the  Letter  of  Credit  No issued  for  my/our  account  and 

for  the  payment  of  any  other  indebtedness  of  mine/ours  to  The 
Associated  Trust  C^o.  of  Nkw  York. 

The  Associated  Trust  Co.  of  New  York  may  at  any  time  cancel 
this  trust  and  take  possession  of  said  goods,  or  of  the  proceeds  of 
such  of  the  same  as  may  then  have  been  sold,  wherever  the  said 
goods  or  proceeds  of  such  of  the  same  as  may  then  have  been  sold, 
wherever  the  said  goods  or  proceeds  may  then  be  found  and  in  the 
event  of  any  suspension,  or  failure,  or  assignment  for  the  benefit  of 
creditors,  on  my/our  part,  or  of  the  non-fulfillment  of  any  obliga- 
tion, or  of  the  non-payment  at  maturity  of  any  acceptance  made  by 
me/us  under  said  credit,  or  under  any  other  credit  issued  by  The 
Associated  Trust  Co.  of  New  York  on  my/our  account  or  of  any 
indebtedness  on  my/our  part  to  them,  all  obligations,  acceptances, 
indebtedness  and  liabilities  whatsoever  shall  thereupon  (with  or 
without  notice)  mature  and  become  due  and  payable.  The  said 
goods  while  in  my/our  hands  shall  be  fully  insured  against  loss  by 
tire. 

Dated,  New  York  City 191 

(Signed) 

f Stg. 


152     PROBLEMS  IN  FOREIGN  EXCHANGE 

This  form  of  Trust  Receipt  is  used  when  the  merchandise 
against  which  an  advance  has  been  made  remains  in  the 
control  of  the  client. 

TRUST  RECEIPT 


New  York  City 19 

Recexved  from  the  Associateh)  Tkust  Company  of  New  York 
the  following  goods  and  merchandise  specified  in  the  documents 
described  below,  and  in  consideration  thereof  I/we  hereby  agree 
to  hold  said  goods  in  trust  for  it  and  as  its  property  and  to  de- 
liver over  to  the  said  Trust  Company  or  its  assigns  the  ocean  bills 
representing  the  goods  and  merchandise  described  below,  or  other 
negotiable  documents,  or  the  proceeds  of  the  sale  of  the  goods  and 
merchandise  set  forth  in  the  said  documents;  the  delivery  herein 
being  temporarily  made  to  me/us  for  convenience  only,  without  nova- 
tion, or  without  giving  me/us  any  title  to  the  documents,  or  the 
goods  and  merchandise  they  represent,  except  as  trustee  and  agent 
for  the  said  Trust  Company  and  except  to  effect  the  exchange  of  said 
documents  for  ocean  bills  of  lading,  or  to  receive  the  proceeds  thereof 
for  the  aecoiuit  of  said  Trust  Company. 

The  said  Trust  Company  may  at  any  time  cancel  this  trust  and 
take  possession  of  said  goods  and  merchandise  or  of  the  proceeds  of 
such  of  the  same  as  may  then  have  been  sold,  wherever  the  said 
goods  and  merchandise  or  proceeds  thereof  may  then  be  found. 

The  said  goods  and  merchandise  while  in  my/our  hands  shall  be 
fully  insured  against  loss  by  fire  and  any  other  risk  that  said  goods 
and  merchandise  may  be  subjected  to. 

I/we  hereby  agree  to  deliver  said  ocean  bills  of  lading,  or  to  pay 
the  proceeds  arising  from  the  sale  of  the  said  goods  and  merchandise, 
to  the  said  Trust  Company  on  or  before 


Signed. 


FOREIGN  EXCHANGE  DOCUMENTS      153 

This  form  of  Trust  Receipt  is  used  covering  the  delivery 
of  merchandise  actually  sold,  and  is  also  used  in  connection 
with  Import  Letters  of  Credit,  the  relative  shipping  docu- 
ments being  surrendered  to  the  client  against  his  trust  receipt 
in  order  to  enable  him  to  make  delivery  to  the  buyer. 

TRUST  RECEIPT  ^ 


(FOR  DELIVERY  TO  PURCHASER) 


Received  from  The  Associated  Trust  Co.  of  New  York  the  fol- 
lowing goods  and  merchandise,  their  property,  specified  in  the  Bill 

of  Lading  per    ,  dated   

marlved  and  numbered  as  follows: 

In  trust  to  deliver  the  same  to 

who  have  purchased  the  same  for 

payable  in • 

and  to  obtain  from  the  purchaser  the  proceeds  of  the  sale  of  the 
same. 

In  consideration  of  the  delivery  of  said  goods  to  me/us  in  trust  as 
above  I/we  agree  to  deliver  them  immediately  to  the  said  purchasers, 
and  to  collect  the  proceeds  of  sale,  and  immediately  deliver  such  pro- 
ceeds to  The  Associated  Trust  Co.  of  New  York  in  whatever  form 
collected,  to  be  applied  by  them  against  the  acceptances  of  The  Asso- 
ciated Trust  Co.  of  New  York  on  my /our  account,  under  the  terms 

of  Letter  of  Credit  No issued  for  my /our  account, 

and  to  the  payment  of  any  other  indebtedness  of  mine/ours  to  The 
Associated  Trust  Co.  of  New  York.  It  is  understood,  however, 
that  if  such  proceeds  be  in  notes  or  bills  receivable,  they  shall  not 
be  so  applied  until  paid,  but  with  liberty  meanwhile  to  The  Asso- 
ciated Trust  Co.  of  New  York  to  sell  or  discount,  and  so  apply 
net  proceeds. 

The  Associated  Trust  Co.  of  New  York  may  at  any  time  cancel 
this  trust,  and  they  may  take  possession  of  said  goods  until  the  same 
have  been  delivered  to  said  purchasers  and  the  proceeds  of  sale  re- 
ceived from  them,  and  thereafter  of  such  proceeds,  wherever  the  said 
goods  and  proceeds  may  then  be  found,  and  in  the  event  of  any  sus- 
pension or  failure  or  assignment  for  the  benefit  of  creditors  on 
my /our  part  or  of  the  non-fulfillment  of  any  obligation  or  of  the  non- 
payment at  maturity  of  any  acceptance  made  by  me/us  under  said 
credit,  or  any  other  credit  issued  by  The  Associated  Trust  Co.  of 
New  York  on  my/our  account,  or  of  any  indebtedness  on  my /our 
part  to  them,  all  obligations,  acceptances,  indebtedness,  and  liabili- 
ties whatsoever  shall  thereupon  (with  or  without  notice)  mature 
and  become  due  and  payable. 

Dated 191 


154     PROBLEMS  IN  FOREIGN  EXCHANGE 

This  form  of  Trust  Receipt  is  also  used  in  connection  with 
Import  Letters  of  Credit,  and  it  is  temporarily  accepted 
against  the  surrender  of  shipping  documents,  in  order  that 
the  goods  covered  by  such  documents  may  be  placed  in  ware- 
house, and  pending  the  delivery  of  the  warehouse  receipt. 

TRUST  RECEIPT 


(DOCUMENTS  FOR  WAREHOUSING) 


Received  from  The  Associated  Teust  Co.  of  New  York  Bill  of 
Lading  per ,  dated for  the  fol- 
lowing goods  and  merchandise,  their  property,  marked  and  numbered 
as  follows: 


imported  under  the  terms  of  Letter  of  Credit  No , 

issued  by  them  for  my/our  account  the  said  Bill  of  Lading  to  be 
used  by  me/us  for  the  sole  purpose  of  entering  the  above  described 

property  at  the  United  States  Custom  House  at  the  Port  of 

and  of  storing  the  same  in  the  name,  and  as 

the  property^  of  the  said  The  Associated  Trust  Co.  of  New  York, 
and  subject  only  to  their  order,  I/we  hereby  agreeing  to  so  store  the 
said  property  and  to  hand  the  storage  receipt  for  the  same  to  the 
said  The  Associated  Trust  Co.  of  New  York,  when  obtained. 

I/we  ALSO  AGREE  to  fully  insure  said  property  against  fire, 
the  loss,  if  any,  payable  to  said  The  Associated  Trust  Co.  of  New 
York,  and  to  hand  to  them  the  policies  of  insurance  thereon. 

Dated 191 

(Signed) 


FOEEIGN  EXCHANGE  DOCUMENTS      155 

This  form  of  receipt  is  very  specific  as  to  the  terms  and 
conditions  under  which  possession  of  merchandise  is  oh- 
tained. 

BAILEE  RECEIPT 

Received  from  the  Associated  Trust  Company  of  New  York 
solely  for  the  purpose  of  selling  same  for  account  of  said  Company: 


marked  and  numhered 

and hereby  undertake  to  sell  the  property  herein 

specified,  for  account  of  the  said  Company,  and  collect  the  proceeds 
of  the  sale  ar  sales  thereof,  and  deliver  the  same  immediately  on 
receipt  thereof  to  the  said  Company,  to  be  applied  to  the  credit  of 


hereby  acknowledging to  be  Bailee  of  the  said 

property  for  the  said  Company,  and do  hereby 

assign  and  transfer  to  the  said  Company  the  accounts  of  the  pur- 
chaser or  purchasers  of  said  property  to  the  extent  of  the  purchase 
price  thereof,  of  which  fact  notice  shall  be  given  at  the  time  of  de- 
livery of  the  said  property  by to  such  purchaser  or  pur- 
chasers and  all  invoices  therefor  shall  have  imprinted,  taritten  or 
stamped  thereon  by the  following  : 

"Transferred  and  payable  to  ASSOCIATED  TRUST  COMPANY 
OF  NEW  YORK,  I'lO  Broadway,  New  York." 

If   the  said  property   is  not   sold   and   the  proceeds  so   deposited 

toithin  ten  days  from  this  date, undertake  to  return 

all  documents  at  once  on  demand,  or  to  pay  the  value  of  the  goods, 
at  the  Company's  option. 

The  said  goods  while  in  my/our  hands  shall  be  fully  insured 
against  loss  by  fire. 

The  terms  of  this  receipt  and  agreement  shall  continue  and  apply 
to  the  merchandise  above  referred  to  wJiether  or  not  control  of  the 
same,  or  any  part  thereof,  be  at  any  time  restored  to  the  Associated 
Trxist  Company  of  Neio  York,  and  subsequently  delivered  to  us. 

Dated  at  New  York  City, 191 

(Signed) 


APPENDIX  B 

FOREIGN  EXCHANGE  TABLES 

Tlie  purpose  of  this  appendix  is  to  illustrate  the  material 
contaiued  in  foreign  exchange  tables.  On  account  of  abnor- 
mal conditions  in  exchange  rates  brought  about  by  the  World 
War,  new  tables  have  had  to  be  compiled  from  time  to  time, 
but  without  necessitating  any  change  in  the  principles  em- 
bodied in  their  construction. 


157 


158      PROBLEMS  IN^  FOREIGN  EXCHANGE 


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FOREIGN  EXCHANGE  TABLES 


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160      PROBLEMS  IN  FOREIGN  EXCHANGE 


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FOREIGN  EXCHAXGE  TABLES     165 


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166       PROBLEMS  IN  FOREIGN  EXCHANGE 


2.  Pages  from  Buchan's  Exchange  Tables 

Discount  to  be  added  to  60  Day  Rate 

TO  ascertain  value  of 
Short  Exchange  or  Cable  Transfers 


Rate  of 
Discount 

in 
London 

45 
Days' 
Sight 

30 
Days' 

Sight 

15 
Days' 

Sight 

3 

Davs' 

Sight 

On 

Demand 

Cable 
Transfers 

^^6 

.0001 

.0002 

.0004 

.0005 

.0005 

.0006 

% 

.0002 

.0005 

.0007 

.0009 

.0010 

.0012 

1   % 

.0020 

.0040 

.0060 

.0076 

.0084 

.0100 

1%" 

.0025 

.0050 

.0075 

.0095 

.0105 

.0125 

IVs" 

.0030 

.0060 

.0090 

.0114 

.0126 

.0150 

1%" 

.0035 

.0070 

.0105 

.0133 

.0147 

.0175 

2  % 

.0040 

.0080 

.0120 

.0152 

.0168 

.0200 

2y4" 

.0045 

.0090 

.0135 

.0171 

.0189 

.0225 

21/2  " 

.0050 

.0100 

.0150 

.0190 

.0210 

.0250 

2%" 

.0055 

.0110 

.0165 

.0209 

.0231 

.0275 

3  % 

.0060 

.0120 

.0180 

.0228 

.0252 

.0300 

3V4" 

.0065 

.0130 

.0195 

.0247 

.0273 

.0325 

3%  " 

.0070 

.0140 

.0210 

.0266 

.0294 

.0350 

3%" 

.0075 

.0150 

.0225 

.0285 

.0315 

.0375 

4  % 

.0080 

.0160 

.0240 

.0304 

.0336 

.0400 

4%" 

.0085 

.0170 

.0255 

.0323 

.0357 

.0425 

4%  " 

.0000 

.0180 

.0270 

.0342 

.0378 

.0450 

4%" 

.0095 

.0190 

.0285 

.0361 

.0399 

.0475 

5  % 

.0100 

.0200 

.0300 

.0380 

.0420 

.0500 

5%" 

.0105 

.0210 

.0315 

.0399 

.0441 

.0525 

51/2  " 

.0110 

.0220 

.0330 

.0418 

.0462 

.0550 

5%  " 

.0115 

.0230 

.0345 

.0437 

.0483 

.0575 

6  % 

.0120 

.0240 

.0360 

.0456 

.0504 

.0600 

6y4" 

.0125 

.0250 

.0375 

.0475 

.0525 

.0625 

eva" 

.0130 

.0260 

.0390 

.0494 

.0546 

.0650 

6%" 

.0135 

.0270 

.0405 

.0513 

.0567 

.0675 

7  % 

.0140 

.0280 

.0420 

.0532 

.0588 

.0700 

Example.     To  find  the  value  of  a  30-days'  sight  bill  when 
60  days'  exchange  is  quoted  4.86  and  rate  of  discount  in  London 


FOKEIGN  EXCHANGE  TABLES  167 

is  8  per  cent,  find  the  line  of  3  per  cent  at  left  hand  side  of 
table  above,  and  add  the  decimal  found  in  SO-days'  sight  column, 

thus  —  60  days'  sight  4.86 

30     "         "       0120 

Value  of  30-day3'  sight  bill , 4.8720 

In  the  same  way  45  days  will  be  4.8660,  3  days,  4.8900,  etc., 
etc. 

Should  the  rate  of  discount  be  at  a  smaller  fraction  than  % 
of  1  per  cent,  add  or  deduct  the  decimal  for  discount  rates  of 
%  or  %6  as  the  case  may  be,  as  found  in  first  two  lines  of  the 
table. 

12  days  are  allowed  for  remittance  and  acceptance ;  allowance 
is  also  made  for  3  days'  grace. 


168      PROBLEMS  IN  FOREIGN  EXCHANGE 


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BOOKS  ON  BANKING  AND  FINANCE 


MONEY  AND  BANKING 

By  JOHN  THOM  HOLDSWORT.I 

The  whole  subject  of  money  and  banking  described  to  meet  the 
needs  of  every  business  man. 

THE  MODERN  BANK 

By  AMOS  KIDDER  FISKE 

Covers  the  various  functions  of  the  present  day  bank  in  the 
United  States  and  the  methods  by  which  it  operates. 

THE  WORK  OF  WALL  STREET 

By  SERENO  S.  PRATT 

Newly  revised  edition  of  this  standard  work  on  the  mechanism, 
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ACCEPTANCES,  BANKERS'  AND  TRADE 

By  PARK  MATHEWSON 

The  first  comprehensive  book  on  the  subject  Gives  the  theory, 
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FOREIGN  EXCHANGE 

By  A.  C.  WHITAKER 

Clarifies  fully  the  principles  of  foreign  exchange  and  gives  an 
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CORPORATION  FINANCE 

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D.      APPLETON 

AND 

COMPANY 

NEW  YORK 

LONDON 

T673 


BOOKS   ON   FOREIGN  MARKETS 

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STRAIGHT  BUSINESS  IN  SOUTH 

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Tells  exactly  what  the  facts  are  concerning  trade  with 
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EXPORTING  TO  LATIN  AMERICA 

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A  timely  volume  for  merchants  and  commercial  houses  on 
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trade,  foreign  investments  and  concessions,  the  "open  door," 
etc. 


D.     APPLETON     AND     COMPANY 

NEW  YORK  LONDON 


T705 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

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